A firm is considering two distinct set of circumstances that assume high inflation and low inflation. In the high inflationary set of circumstances, the price per unit will be affected as well as the variable and fixed costs. If the low-inflation set of circumstances is considered the baseline, then the analysis concerning the high inflationary circumstances could be considered:
A) a sensitivity analysis.
B) a scenario analysis.
C) a Monte Carlo simulation.
D) a horizontal analysis.

Question

Quizplus · Accepted Answer

The high inflationary circumstances represent a different scenario, where the variables and fixed costs are affected. Therefore, this analysis can be considered a scenario analysis, which evaluates the financial outcomes of different scenarios. Sensitivity analysis is used when evaluating the impacts of changes in particular variables, whereas Monte Carlo simulation involves using random variables to estimate different outcomes. Horizontal analysis involves comparing financial statements over different periods to identify trends.

A Firm Is Considering Two Distinct Set of Circumstances That