Forecasting & Projections

Question 1

Sensitivity Analysis = What If Analysis

Answer 1

Experimenting with changes in different variables to see the consequences of various changes. Determines which variables are most sensitive to change and will have the biggest impact on the bottom line.

Question 2

Scenario Analysis

Answer 2

Prepare multiple scenarios for models for future periods.
Then assign probabilities to them to come up with weighted totals.

example: 40% likelihood 15% sales growth
10% likelihood 1% sales decline
50% likelihood No sales change

If sales in previous year were $40,000,000, projected sales for next yr would be:

(40% x .15) + (10% x -.01) + (50% x 0%) = 5.9%
$40 million x 1.059 = $42,360,000.

Question 3

Forecasting Analysis

Answer 3

Predicting future values of a dependent variable using information from previous time periods.

Question 4

Regression Analysis

Answer 4

Simple linear model:

y = a +Bx

y = Total Costs (Vertical Axis) DEPENDENT VARIABLE
x = Units Produced (Horizontal Axis) INDEPENDENT
VARIABLE
a = Fixed Costs The Y Axis intercept of the regression
line. If Y is total costs, a would measure total fixed
costs.
B = The Slope of the Regression Line is the Variable Cost
per unit.

Question 5

The Coefficient of Correlation (r)

Answer 5

Measures the strength of the linear relationship between the independent and dependent variables (y) and (x).

The range is from - 1.00 to + 1.00

+1.00 is a Perfect Positive Correlation (i.e. the total cost is
Directly related to the production volume)The line
slopes up from the x axis bottom left corner to the
upper right corner on the y axis.

-1.00 is a Perfect Inverse Correlation. Line slopes down
from the upper y axis top left to the lower x axis
bottom right.

0 indicates No Correlation - independent and
dependent variables are not related.

Question 6

The Coefficient of Determination (R) squared

Answer 6

The % of the total variation in the correlation that is attributed to production volume.

On a scale from -1 to 1, .81 or 81% is a strong positive correlation.

Question 7

Learning curve

Answer 7

The premise that as workers become more familiar with a specific task, the per-unit labor hours will decline, until a steady-state period is achieved.

Question 8

High-Low Method

Answer 8

Technique used to estimate the fixed and variable portions of cost, usually production costs.

1. Determine the difference between the high and low of a series of months. Do this for both the volume/units and the cost.
2. Determine the variable cost per unit by dividing the difference in cost by the difference in units.
3. Check by taking the total cost for the high month, less the number of units x the variable cost per unit from step #2. This gives you the total fixed costs.
4. Repeat the third step for the low month and you should get the save total fixed costs.

Ex: Units Cost
High Month 1,400 $9,550
Low Month 1,000 $8,450
Difference 400 $1 ,100

$1,100 / 400 = variable cost/unit = $2.75

                                    High                         Low Units                               1,400                       1,000 Total Costs                    $9,550                    $8,450 Var Costs @ $2.75       ($3,850)                  ($2,750) Total Fixed Costs          $5,700                    $5,700