SENSITIVITY

The word ‘sensitivity’ is rarely mentioned in the Paper F5 exam, which is why there is no specific lecture on it.

However, if you understand what the word means (and I will explain it) then it requires no extra knowledge from what is covered in my lectures on CVP analysis.

Sensitivity is the % change in the item that would result in a profit of zero (any great change and they would be making a loss).

So, in this example, looking at the sales volume, if the sales volume changes then so to does the contribution. To end up with a profit of 0, then the contribution would have to be 70. The contribution is currently 455 and so it would need to fall by 455 – 70 = 385, which is a % fall of 385/455 = 84.6%

But if you look instead at just the sales price changing then only the total revenue will change (volume and total variable costs will stay the same). To end up with a profit of zero, contribution has to be 70, and therefore total revenue will have to be 70 + 845 = 915.
So a fall in revenue of 1,300 – 915 = 385, or a % fall of 385/1,300 = 29.6%

So…..a smaller fall in sales price will lead to a profit of zero than the fall in sales volume, which means that the sales price is more sensitive.

You can do the workings any way that you like – nobody looks at your workings for the section A and B questions.

If sales volume changes, then both revenue and variable costs change, so we look at the change in contribution.

If sales price changes, then certainly the contribution will be different, but the variable costs will not change, so the only thing that will be directly affected is the revenue.