Question

Sensitivity analysis

If you can sell a product for $67 and it costs you $28 per unit to produce, while also paying $3,900 per month in fixed expenses, how many units must you sell each month in order to earn a monthly profit of $2,500? Show all your work.

Using the information from the first problem, your variable costs per unit include labor ($18) and parts ($10). Your fixed costs include maintenance of $750, rent and utilities of $2000, and administration costs of $1150. If you have a labor issue and your costs might vary by $2 next month; and you might have a major repair issue that will add $500; and your administrative costs might vary by 10%. Which is the most important issue to focus on? Conduct a sensitivity analysis of the situation and show all of your work.

Answer 1

Let us assume no. of units to be sold each month = x

revenue = 67*x

cost = 28*x + 3900

profit to be made = 2500

67x - (28x + 3900) = 2500

39x = 2500 + 3900

x = 164.1 = 164 units

b)

varying of labor cost = 2

assuming same production, change in variable cost = 2*164 = 328

repair issue will add = 500

adinistrative cost will vary = 10%

it might add = 10%*1150 = 115

Hence the biggest cost addition would be from the repair issue, hence we should focus more on that.

Although labor issue is also critical. but currently repair issue should be prime focus.