Scenario and sensitivity analysis question

Scenario analysis could help forecast the amount of profit or lose you make on the 8,800 units of shoes sold. The sales could be 10% higher or lower, thus it is important to know the businesses financial position at each possible outcome. For example, would the business be breaking even if the sales are only equal to the lowest figure forecast and if not, now much loss are they making. I.e., what is the best- and worst-case scenario.

The sensitivity analysis is a tool used to determine the responsiveness target variables have on a business’s financials. The idea is to test the solutions to find the optimal solution. Sensitivity reports can be generated in excel. A sensitivity report could analysis the most optimal expansion solution.

The scenario identified in the question brief we shall call the ‘base case’. This scenario results in revenue of €140,800.00.

The three alternative scenarios I have identified are as follows:

‘Better case’, this as is shown above, results in slightly better out come than the base case but not the best case. In this scenario the purchase cost is reduced to 22 and we achieve the same 8800 sales. This results in additional revenue of €158,400.00 a difference of +€17,600 compared with the ‘base case’.

‘Best case’ this case the best possible given the variables. Purchase cost is the lowest (€20) and total sales the highest (8800 + 10% or 9,680). This scenario generates an additional €193,600.00 difference of +€52,800

‘Worse case’ this case is the worst possible case given the variables. Here we have the highest purchase cost (€24) and the lowest sales volume (8,800 – 10% or 7920) resulting in revenue of €126,720.00 this is €14080 less than the ‘base case’

The number of sales is uncontrollable because a business cannot control demand. There are many other factors outside the businesses control that affect demand.