A S|mp|e Iramework of Sens|t|v|ty Ana|ys|s

llxed CosLs
ManufacLurlng CosLs 2000
CLhers 1000
1oLal llxed CosLs 3000
varlable CosL/ unlL
ManufacLurlng CosLs 2
CLhers 3
1oLal unlL vrlable CosL 3
unlLs Sold llxed CosL varlable CosL 1oLal CosL 8evenue roflL
0 3000 0 3000 0 3000
100 3000 300 3300 1000 2300
200 3000 1000 4000 2000 2000
300 3000 1300 4300 3000 1300
400 3000 2000 3000 4000 1000
300 3000 2300 3300 3000 300
600 3000 3000 6000 6000 0
700 3000 3300 6300 7000 300
800 3000 4000 7000 8000 1000
Cost Structure of a f|rm and effect|veness of a|ternate bus|ness strateg|es
CbservaLlon llrm A has more varlable cosL and less flxed cosL Lhan flrm 8 Lhough LoLal cosL and proflL are Lhe same for boLh flrms
llrm A llrm 8 llrm A llrm 8 llrm A llrm 8 llrm A llrm 8
Sales 100 100 130 130 100 100 100 100
1oLal varlable CosL 70 20 91 26 49 14 70 20
ConLrlbuLlon Margln 30 80 39 104 31 86 30 80
llxed CosL 20 70 20 70 20 70 14 49
roflL 10 10 19 34 31 16 16 31
1ake Aways
1 lncreaslng sales by 30 beneflL flrm 8 more Lhan flrm A because flrm 8 has less varlabe cosL Lhan flrm A
2 lf Lhe flrm can only decrease varlable cosL by 30 flrm A beneflL more Lhan flrm 8
3 lurLher llrm A ls beLLer of decreaslng varlable cosLs Lhan lncreaslng sales by 30
Where flrm 8 ls beLLer off lncreaslng sales by 30 Lhan decreaslng varlable cosL by Lhe same
4 lf Lhe flrms can only decrease Lhe flxed cosLs by 30 boLh Lhe flrms are beLLer off by lncreaslng Lhe sales by 30 Lhan by decreaslng Lhe flxed cosLs by Lhe
same
8ase L|ne Increase Sa|es by 30 Decrease VC by 30 Decrease IC by 30
Cost Structure of a f|rm and effect|veness of d|fferent pr|ce strateg|es
CbservaLlon llrm A has lower conLrlbuLlon margln Lhan flrm 8
llrm A llrm 8 llrm A llrm 8
Sales 100 100 Sales 100 100
1oLal varlable CosL 70 10 1oLal varlable CosL 70 10
ConLrlbuLlon Margln 30 90 ConLrlbuLlon Margln 30 90
llxed CosL 20 80 llxed CosL 20 80
roflL 10 10 roflL 10 10
1 rlce 8educLlon 3 3 1 rlce lncrease 3 3
new ConLrlbuLloln Margln 23 83 new ConLrlbuLloln Margln 33 93
8reakeven sales change 02 0039 8reakeven sales change 0143 00326
2 rlce 8educLlon 10 10 2 rlce lncrease 10 10
new ConLrlbuLloln Margln 20 80 new ConLrlbuLloln Margln 40 100
8reakeven sales change 03 0123 8reakeven sales change 023 01
3 rlce 8educLlon 20 20 3 rlce lncrease 20 20
new ConLrlbuLloln Margln 10 70 new ConLrlbuLloln Margln 30 110
8reakeven sales change 2 0286 8reakeven sales change 04 0182
1ake Away
1 lor any glven decrease ln prlce flrm A musL lncrease lLs sales by a much larger Lhan flrm 8
Pence flrm A wlll flnd lL more dlfflculL Lo pursue a sLraLegy of reduced prlces Lo lmprove lLs flnanclal poslLlon
2 lor any glven lncrease ln prlce flrm 8 beneflLs less Lhan A ln Lerms of Margln of safeLy le frlm A s reducLlon
ln breakeven sales ls greaLer Lhan flrm 8
?ou are negoLlaLlng wlLh a Mall owner Lo lease space for lLs compuLer sLore
1here are 3 posslble renLal alLernaLlves offered by Lhe mall owner
CpLlon 1 1000 llxed lee
CpLlon 2 400 llxed lee plus 10 of sLore revenue
CpLlon 3 20 of sLore revenue wlLh no flxed fee
CpLlon 1 CpLlon 2 CpLlon3
1000 400 0
0 10 20
10 10 10
3 3 3
600 600 600
3 4 3
3000 2400 1800
2000 2000 1800
13 12 1
900 900 900
3 4 3
4300 3600 2700
3300 3200 2700
1300 1200 900
Change 73 60 30
1200 1200 1200
3 4 3
6000 4800 3600
3000 4400 3600
3000 2400 1800
Change 130 120 100
CperaLlng lncome
Change ln CperaLlng lncome
Change ln CperaLlng lncome
Scenarlon 3
unlLs Sold
ConLrlbuLlon margln
1oLal ConLrlbuLlon
CperaLlng lncome
unlLs Sold
ConLrlbuLlon margln
1oLal ConLrlbuLlon
CperaLlng lncome
uegree of CperaLlng Leverage
Scenarlon 2
unlLs Sold
ConLrlbuLlon margln
1oLal ConLrlbuLlon
Scenarlon 1
llxed lee
vralable as of 8evenue
8evenue per unlL
CLher vC