Sensitivity test
The recalculation of a result under a changed assumption, to find out whether the decision depends on it. On the cost split, it consists of moving ten points from the fixed column to the variable column and observing what the break-even point does.
What it changes for the executive
It answers the most serious objection to any reading of the accounts: the fixed-variable split is a judgement, not a measurement. The test shows that the more fixed costs dominate, the less the precision of the split matters, and that the reverse is true in activities rich in variable costs. The only question worth asking is: does the decision I was about to take change between the two values? If not, the split is precise enough; if so, you know which items to revisit.
Example
In an engineering firm with eighty-nine per cent fixed costs, a ten-point classification error moves the break-even point by only one per cent. In a trading company, the same shift drops it by twelve per cent.
A term that is missing?
Describe the situation in a few lines; the reply is personal.