Profit sensitivity analysis under uncertainties for cases of production capacity surplus and shortage

Hirokazu Kono, Tadahiro Mizumachi

Research output: Contribution to journalArticle

5 Citations (Scopus)

Abstract

In today's uncertain economic environment,The evaluation of safety for economic alternatives is of practical importance. This paper examines the method of quantitatively evaluating profitability and risk using sensitivity coefficients. The paper assumes such factors as unit sales price, volume, unit variable cost, and fixed cost for each economic alternative. It takes into account the balance between production capacity and demand, distinguishing between cases of capacity surplus and shortage. It also takes the factor of yield into consideration. Where production capacity is in surplus, an increase in capacity does not bring about an increase in income, while in cases of production capacity shortage, an increase in capacity results in an increase in contribution margin. This paper investigates the case in which the values of each factor independently move from the originally expected values toward the direction of decreasing profit, and derives sensitivity coefficients for each of the incorporated factors, in cases of both capacity surplus and shortage. The meanings of the derived sensitivity coefficients are examined. Further, the breakeven point for each factor under consideration is derived and indicated on the total-cost unit-cost domain. An area which is safer against unexpected changes in relevant factors is elucidated. Thus, this paper proposes a systematic procedure for evaluating profitability as well as risk for economic alternatives under uncertainties distinguishing between the cases of production capacity surplus and shortage.

Original languageEnglish
Pages (from-to)464-476
Number of pages13
JournalJournal of Japan Industrial Management Association
Volume59
Issue number6
Publication statusPublished - 2009

Fingerprint

Shortage
Sensitivity analysis
Sensitivity Analysis
Profit
Profitability
Uncertainty
Economics
Sensitivity Coefficient
Costs
Unit
Alternatives
Sales
Sale price
Surplus
Factors
Production capacity
Expected Value
Margin
Safety
Coefficients

Keywords

  • Breakeven point
  • Capacity shortage
  • Capacity surplus
  • Profitability
  • Risk
  • Sensitivity coefficient

ASJC Scopus subject areas

  • Industrial and Manufacturing Engineering
  • Applied Mathematics
  • Management Science and Operations Research
  • Strategy and Management

Cite this

Profit sensitivity analysis under uncertainties for cases of production capacity surplus and shortage. / Kono, Hirokazu; Mizumachi, Tadahiro.

In: Journal of Japan Industrial Management Association, Vol. 59, No. 6, 2009, p. 464-476.

Research output: Contribution to journalArticle

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