SOLUTION: Because the parameters used in mathematical models are frequently estimates, actual results may differ from those projected by the aforementioned mathematical analysis in Part-A.

Question 1173651: Because the parameters used in mathematical models are frequently estimates, actual results may
differ from those projected by the aforementioned mathematical analysis in Part-A. To account for
some of the uncertainties which may exist in a problem, analysts often conduct sensitivity analysis.
The objective is to assess how much a solution might change if there are changes in model
parameters. Assume that the software development costs by outside firms might actually fluctuate
by ±15% from the $2.5 per-line estimate.
Re-compute the breakeven points if the costs are 15 percent higher or lower (compute for both
the cases) and compare your results with the original answer in Part A.

Answer by CPhill(1959) (Show Source): You can put this solution on YOUR website!
Absolutely! Let's break down the sensitivity analysis for the software development costs.
**Understanding the Original Scenario (Part A - Assumed)**
To effectively compare, we need to know the original scenario from Part A. However, based on the context, we can infer that:
* **Fixed Costs:** We'll assume a fixed cost (let's denote it as 'FC').
* **Variable Cost (Original):** $2.5 per line of code.
* **Selling Price (Original):** We need a selling price per line of code or per unit to calculate the breakeven point. Let's denote this as 'SP'.
* **Breakeven Point (Original):** The breakeven point would be calculated based on these original parameters.
**Sensitivity Analysis: Fluctuating Costs**
We'll now analyze the impact of a ±15% change in the variable cost.
**1. 15% Increase in Variable Cost:**
* New Variable Cost: $2.5 + (15% of $2.5) = $2.5 + $0.375 = $2.875 per line.
* New Breakeven Point:
* Breakeven Point (Units) = FC / (SP - $2.875)
**2. 15% Decrease in Variable Cost:**
* New Variable Cost: $2.5 - (15% of $2.5) = $2.5 - $0.375 = $2.125 per line.
* New Breakeven Point:
* Breakeven point (Units) = FC / (SP - $2.125)
**Comparison with Original Results (Part A)**
To provide a concrete comparison, let's assume some values for FC and SP.
**Example Scenario:**
* Fixed Costs (FC): $100,000
* Selling Price (SP): $5 per line.
**Original Breakeven Point:**
* Breakeven Point (Units) = $100,000 / ($5 - $2.5) = $100,000 / $2.5 = 40,000 lines.
**Sensitivity Analysis Results (Example):**
1. **15% Increase:**
* Breakeven Point (Units) = $100,000 / ($5 - $2.875) = $100,000 / $2.125 = 47,058.82 lines (approximately 47,059 lines).
2. **15% Decrease:**
* Breakeven Point (Units) = $100,000 / ($5 - $2.125) = $100,000 / $2.875 = 34,782.61 lines (approximately 34,783 lines).
**Comparison:**
* Original: 40,000 lines.
* 15% Increase: Approximately 47,059 lines.
* 15% Decrease: Approximately 34,783 lines.
**Observations:**
* An increase in the variable cost leads to a higher breakeven point, meaning you need to produce and sell more to cover your costs.
* A decrease in the variable cost lowers the breakeven point, making it easier to achieve profitability.
* The change in cost of 15% has a significant change to the breakeven point.
* The sensitivity analysis shows how important it is to have accurate cost estimations.
**Key Takeaway:**
Sensitivity analysis is crucial for understanding the potential impact of uncertainties on your business decisions. By examining how changes in key parameters affect the breakeven point, you can better prepare for potential risks and make more informed choices.

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