How does sensitivity analysis assist in decision making?

Sensitivity analysis is a crucial tool in decision-making as it helps evaluate how different variables affect a particular outcome. By analyzing the impact of changes in key variables—such as costs, revenues, or market conditions—sensitivity analysis enables managers to understand potential risks and uncertainties associated with their decisions.

For instance, if a business is considering launching a new product, sensitivity analysis can reveal how variations in sales volume or production costs may influence profitability. This insight allows decision-makers to identify worst-case and best-case scenarios, equipping them with the information needed to make informed decisions, mitigate risks, and strategize effectively.

Using sensitivity analysis, businesses can prioritize areas that need more attention, such as managing specific costs or exploring alternative pricing strategies. Essentially, it provides a structured way to explore "what-if" scenarios, leading to a deeper understanding of potential risks and their implications on business performance.