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SENSITIVITY ANALYSIS

Managers need to observe the financial standing of the companys

cash flows. This is because of the uncertainties inherent in every business

that the managers necessarily have to determine in order to uncover these

adverse situations. Moreover, managers may also set various alternatives

to assume different circumstances to analyze cash flows, this are what we

call- sensitivity analysis.

Sensitivity analysis is a tool used to consider different scenarios that

is dissimilar to what is previously considered to measure the volatility of

financial performance and position of the business with respect to sales

and costs. Considering the rapid changes of prices of the commodities and

goods due to inflation and other factors, sensitivity analysis is a useful

means in determining the possible effect of these changes in a certain

variable from what was previously assumed.

Considering the different scenarios given below, a forecast of the

effect in the companys financial performance in relation to the companys

financial performance, return on equity, payback period, and break even

point are presented in the next page:

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Table 20
Assumptions for Sensitivity Analysis
Particulars Scenario 1 Scenario 2 Scenario 3
Inc. Dec. Inc. Dec. Inc. Dec.
Sales 10% 10%
Direct Materials 4% 4%
Direct Labor 7% 7%
Freight in 3.6% 3.6%
Indirect Materials 4% 4%
Office Supplies 2.5% 2.5%
Expense
Production Tools 4% 4%
Cleaning Supplies 3.3% 3.3%
Rent Expense 4% 4%
Utilities Expense- 4% 4%
Electricity
Utilities Expense- 4% 4%
Water
Utilities Expense- 0.2% 0.2%
Telephone
Utilities Expense-Fuel 3.6% 3.6%
Professional Expense 4% 4%
Advertising Expense 4% 4%
Repairs and 3.3% 3.3%
Maintenance

Sources: Consumer Price Index in the Philippines: 2015