TUTORIAL 10: PERFORMING WHAT-IF

ANALYSES

Objectives

Review the principles of cost-volume-profit relationships

Discuss Excel what-if analysis tools

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Understanding Cost-Volume-ProfitRelationships

Cost-volume-profit (CVP) analysisStudies the relationship between

expenses, sales volume, and profitability

Helps predict the effect of cutting overhead or raising prices on a company’s net income

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CVP (Break – Even Analysis) Cont.

Used to determine at what point a product or activity becomes profitable In break even analysis, there are fixed costs that do

not change There are variable costs based on the number of

units sold These are the costs of raw materials and direct labor

Break-Even Analysis determines how to just pay for costs (net income of zero) The break-even point is that point where the total

net profit is 0

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Comparing Expenses and Revenue

Types of expensesVariable expenses change in

proportion to the amount of business a company does

Fixed expense must be paid regardless of sales volume

Total Expenses = Fixed expenses + variable expenses

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Determining the Break-Even Point

Break-even point: revenue equals expenses

A CVP chart shows the relationship between expenses and revenue

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Ways to Perform What-If Analysis in Excel

Goal Seek Automates trial-and-error process

One-variable data tables Works by changing the value of one input

variable Two-variable data tables

Works by changing the value two input variables

The Scenario manager Input variables are changed using two or more

scenarios

Performing a What-If Analysis with Goal Seek

What-if analysis lets you explore the impact of changing different values in a worksheet

Goal Seek automates trial-and-error process Allows you to specify a value for a calculated

item Excel returns input value needed to reach the

goal Goal Seek dialog box – determining break-even point

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Performing a What-If Analysis with Goal Seek

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One-variable Data Tables (Introduction)

Use to calculate different expected outcomes by changing the value of a single variable

Note that we could do this by hand using mixed formula references

When creating data tables, the structure of the data must be in a specific form

Working with Data Tables Display results from several what-if

analyses One-variable data table

Specify one input cell and any number of result cells

Useful in business to explore how changing a single input cell can impact several result cells

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Creating a Two-Variable Data Table

Conceptually, they work like one-variable data tables Two inputs are changed instead of one input The resulting output is a grid

Analyzes a variety of combinations simultaneously

Uses two input cells, but displays only a single result value

Must identify the row input cell and the column input cell

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Creating a Two-Variable Data Table

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The Scenario Manager (Introduction)

Use the Scenario Manager to vary one or more input value

Each unique combination of input values is called a scenario Input cells are called changing cells There can be many scenarios Scenarios usually vary from best possible case to

worst possible case Scenario input must be well-structured

The Scenario Manager (Cont)

Using the Scenario Manager can be confusing as you don’t see the input values to the scenarios

Create scenarios to perform a what-if analysis with more than two input cells

Define names for all input and result cells that you intend to use in the analysis Use named ranges for the input values to simplify the

creation of scenarios Defined names automatically appear in reports

generated by the Scenario Manager Using defined names makes it easier to work with

scenarios and understand the scenario reports

Using the Scenario Manager

Use the Scenario Manager to define scenariosEach scenario includes a scenario

name, input cells, and values for each input cell

Number of scenarios is limited only by computer’s memory

Input cells are referred to as changing cellsContain values that are changed under

the scenarioCan be located anywhere in the

worksheet

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Using the Scenario Manager

Edit Scenario dialog box

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Using the Scenario Manager

Scenario Values dialog box

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Using the Scenario Manager

View the effect of each scenario by selecting it in the Scenario Manager dialog box

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Using the Scenario Manager

Editing a ScenarioEdit the assumptions to view other

possibilitiesWorksheet calculations are

automatically updated to reflect the new scenario

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Finding an Optimal Solution Using Solver

Solver searches for the optimal solution to a problem involving several variables

Arrives at optimal solutions through an iterative procedure

Because it is an add-in, Solver might need to be activated

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Setting Up Solver to Find a Solution

Specify three Solver parameters Objective cell Variable (or changing) cells Constraints

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Setting Up Solver Constraints

Constraints confine the solution within a reasonable set of defined limits

Constraints supported by Solver<=, >=, and =integer or intbinary or bindif or AllDifferent

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Setting Up Solver Constraints

Add Constraint dialog box

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Setting Up Solver Constraints

Completed Solver Parameters dialog box

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Choosing a What-If Analysis Tool

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Data tables • To perform several what-if analyses involving one or two input cells and to display analysis in a tabular format

• Easily displayed as charts

Create a scenario

• For what-if analyses involving more than two input cells• Scenario summary tables and scenario PivotTables can be

used to obtain a quick snapshot of several possible outcomes

• Scenarios can be merged and shared among several workbooks

Solver • To maximize or minimize a value (provide a single solution or “best outcome”)

• To set a calculated cell to a specific value

Goal Seek • If you don’t need to specify any constraints on your solution