Condensed Memo

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MEMO:

Sensitivity analysis is the assessment of potential responses in revenues, costs, and quantities that arise from changes made in the budgeted assumptions, which are shown in Exhibit 1 of the attached spreadsheet. Using rational assumptions, sensitivity analysis can be used to evaluate the effects of different circumstances that a company can expect to come across in the market. Although the budgeted figures are derived from dependable factors including historical trends and future expectations, budgeted amounts are still only estimates. Sensitivity analysis is useful for measuring fluctuations in income due to internal and external changes a company can expect to occur. Using a given set of budgeted sales, it is important to analyze the effects on income from potential changes Toddler Toy Company will be encountering.

Exhibit 4 shows that the addition of a new advertising campaign to increase sales volume is a strategy that will positively impact income, assuming that the increase in sales volume is found to occur at the expected level. With the addition of the campaign, it is expected to generate additional sales of nearly sixty thousand units in total. Once the campaign is launched, these estimates seem within reach for the company, though they are not guaranteed.

Increasing the price per unit is something that typically corresponds with a decrease in units sold, as demonstrated in Exhibit 6. Given a ten percent increase in price and a five percent decrease in units sold, there is nearly $140,000 in increased income over the original income from Exhibit 1. If these percentages are based on previous market responses in similar economic conditions, the subtle increase in price may be very profitable for the company.