Please refer to the screenshots for numbers. Sensitivity analysis involves assessing the effect of changes in one input variable at a time. These inputs may include sales, fixed costs, and variable costs which all affect the profitability of a project.

Scenario analysis creates different scenarios that can be labeled as $(1)$ pessimistic, $(2)$ optimistic, and $(3)$ most likely scenario. It then changes the input variables and calculations the NPV for each scenario.

Simulation analysis involves examining the effect on NPV all uncertain input variables follow their corresponding probability distributions.

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Sensitivity Analysis

How much does the first quarter net income increase if sales are $10\%$ more each month than forecasted?

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How much does the first quarter net income decrease if sales are $15\%$ less than forecasted each month?

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Using the original sales projections, what is the impact on the first quarter net income if

the desired FG inventory is increased from $10\%$ of the next months projected sales to $25\%.$

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What is the impact on the first quarter net income if the cost of labor per hour increased from $$15$ to $$25?$

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What is the impact on the first quarter net income if each unit took $10$ minutes instead of $5$ minutes of labor?

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Scenario Analysis

Assume the budgeted income statement you prepared during Week Three is the most likely case. Re$-$title the budgeted income statement as Bgt IS Most Likely. Create two more scenarios, the best and worst cases. Label the worst case as Bgt IS Worst, and the best case Bgt IS Best.

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The Worst$-$Case assumptions follow:

$$ Sales are $25\%$ lower each month.

$$ Direct materials cost $$\mathrm{.}10$ per pound

$$ It takes $6$ minutes to produce each unit and labor costs $$18$ per hour.

$$ Fixed overhead is $$2,500$ per month.

$$ Fixed selling & administrative costs are $$5,000.$

$$ Sales commissions are $$0\mathrm{.}05$ per unit

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What is the first quarter net income for the worst case?

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The Best$-$Case assumptions follow:

$$ Sales are $25\%$ higher each month.

$$ Direct materials cost $$\mathrm{.}06$ per pound

$$ It takes $4$ minutes to produce each unit and labor costs $$14$ per hour.

$$ Fixed overhead is $$1,000$ per month.

$$ Fixed selling & administrative costs are $$1,500.$

$$ Sales commissions are $$0\mathrm{.}02$ per unit

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What is the first quarter net income for the best case?

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Calculate the first quarter net income by weighting the most likely as $\mathrm{.}5,$ and the best$-$ and worst$-$case scenarios as $\mathrm{.}25$ each.