Using Cost-Volume-Profit Models for Sensitivity Analysis

Seldom are financial predictions exactly correct; there is a natural variance in predictions. As a result of this natural variance, managers should always be aware of how sensitive their predictions are to fluctuations in the model’s variables. Sensitivity analysis shows how the cost-volume-profit model will change with changes in any of its variables. Although the focus is typically on how changes in variables affect profit, accountants often analyze the impact of uncertainty on the break-even point and target profit as well. Read section 6.3. to learn more.