Memo on Sensitivity Analysis - Assignment Example

Definition: Sensitivity analysis allows a critic to assess the effects brought about by changing one or many parameters on a model’s conclusion.

Function: It mainly determines the relationship between revenues, costs, and net income. It gives the business room to see the direct impact of falling short on expected variables, such as procurement costs, sales levels, or several distribution channels.

Spreadsheets benefits: It does not only provide the user with a way to present numbers but also to give the mathematical relationship between the numbers so that the implications of the different assumptions could be prepared easily and persistently.

Parameters to be changed: There will be an addition of raw materials to produce more products to cater to the growing market and the purchase of new equipment, to avoid overworking the old machines due to extra production of products.

Assumptions:
- The market will keep growing.
- The economy will be stable.
- There will be easy availability of raw materials and labor.

An increase in cost that is bound to happen due to the purchase of a new machine and extra production of products will affect the Net income of the company. But because of the increase in sales due to the growing market, the costs are to be covered without any problem. Nonetheless, an increase in sales means an increase in advertising costs, labor costs, but an increase in sales revenue is the outcome that will eventually increase the net income in the income statement. As this system is implemented, the management can track the vital in-combination cost drivers, and be proactive in auctioning changes should the need arise (Scot, Chan, & Saltelli, 2000).