Cost Sensitivity Formula

Cost Sensitivity Formula

NPV Cost sensitivity may be calculated by the Following Simple formula.

Sales Sensitivity =    Net Present Value of project (NPV)

                                         PV of Variable Cost

Example

Variable Cost = 8,000

NPV = 3,000

Calculate Cost sensitivity?

Solution

Variable Cost Sensitivity =    3,000 x100

                                           8,000

= 37.5%

It means if cost increases by 37.5%, then NPV will become Zero

Desired Profitability Formula

Desired Profitability Formula

Desired Level of profitability may be calculated by the following formula.

Desired Profitability = [Fixed Cost + Desired Profit]/unit Contribution

Example

Fixed Cost = 50,000

Profit = 30,000

Sales price = 30

Variable Cost = 18

Solution

Unit Contribution = 30-18

=12

= [50,000+30,000]/12

=80000/12

=6,667 (units)

Break Even Formula

Break Even Formula

Break even is a point, where organization is earning neither profit nor incurring any losses. This concept has fundamental importance for decision making. Break even point may be calculated by the following formula

Fixed Cost/ unit contribution

Where;

Unit contribution = unit Sale price – Unit Variable Cost

Example

Unit Sale Price = 60

Unit Variable Cost = 50

Fixed Cost = 50,000

What is break even point?

Solution

Unit contribution = 60-50

Unit contribution = 10

Required level     = Fixed Cost/unit Contribution

 =50,000/10

 =5,000 units