How do you perform a simple sensitivity analysis for price changes?

• A. Increase production efficiency by a fixed percentage.
• B. Vary price by a chosen percentage and re-calculate impact on profit to see how sensitive profits are.
• C. Forecast cash flows for the next quarter.
• D. Compare with industry averages.

Answer: (B)

Sensitivity analysis looks at how a result changes when an input shifts. For price changes, you start from your base scenario and then adjust the price by a chosen percentage, keeping other factors like costs and expected quantity the same. Recalculate revenue with the new price, recompute profit, and compare it to the baseline. This shows how much profits respond to price movements and helps you understand pricing risk and potential leverage. If profits swing a lot with small price changes, there’s high sensitivity; if they barely change, sensitivity is low. It’s helpful to run a few scenarios (e.g., price up or down by 5–10%) to map the range of possible outcomes.

Other approaches described don’t focus on how profits react to price shifts. Increasing production efficiency targets cost reductions, not price effects. Forecasting cash flows is broader planning, not isolating price impact. Benchmarking against industry averages compares performance to peers, not the specific sensitivity of profit to price changes.