Question

Jasmine Krishnan has been taking entrepreneurship courses as part of her business degree. She developed a plan to start a travel agency specializing in ecotourism trips for students. She learned how to develop CVP analysis in her cost accounting class. Now she is preparing pro forma (i.e., forecasted) income statements for a brochure about her plans for the travel agency.
She wants to use the information from the CVP as a basis for the statements. Her entrepreneurship professor criticized her business plan because Jasmine included too small an amount for liability insurance. However, when she included the amount suggested by her father’s insurance agent, she had to set prices quite high, cut back on the amount she planned as her salary, find lower quality hotels for the students, or take some combination of these actions. She thought that hotel quality and prices would affect sales volumes negatively and did not want to risk incurring losses from low revenues during her first few years. She also needed a base level of salary to at least pay for her living expenses.
She decided to ask friends and relatives to invest in her travel agency to ensure she had enough capital for the first few years. Once her reputation was well established, she assumed that higher customer volumes would cover all of her expected costs. She was confident that her planned trips would attract enough students each year to cover most of her costs. From focus groups on campus, she learned which types of ecotours were most appealing to other students. Now she planned to use sensitivity analysis to solve for volumes that would make the pro forma statements look attractive to investors.

REQUIRED
A. In general, what information do we hope to gain from performing sensitivity analyses? Explain.
B. Explain how bias might enter into Jasmine’s sensitivity analyses.
C. How might Jasmine’s bias affect the quality of the investment brochure information?
D. Identify a potential ethical problem for Jasmine.
E. When you consider the well-being of Jasmine’s family and friends, how would you recommend that Jasmine use sensitivity analysis for her brochure? Explain.



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  • CreatedJanuary 26, 2015
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