Sensitivity Analysis

A business environment can change quickly, so a business should understand how sensitive its sales, costs, and income are to changes. CVP analysis using the break‐even formula is often used for this analysis. For example, marketing suggests a higher quality product would allow The Three M's, Inc., to raise its selling price 10%, from $3.00 to $3.30. To increase the quality would increase variable costs to $2.00 per unit and fixed costs to $350,000. If The Three M's, Inc., followed this scenario, its break‐even in units would be 269,231.

These changes in variable costs and sales result in a higher break‐even point in units than the 250,000 break‐even units calculated with the original assumptions. The critical question is, “Will the customers continue to purchase, and are new or existing customers identified that will purchase the additional 19,231 units of the product required to break even at the higher sales price?”