Effects of Technological Developments on Demand, Selling Prices, Costs, and Margins

Businesses and industries are affected by technological developments. It is, however, impossible to quantify these impacts without making assumptions about the future. These assumptions should be evaluated using scenario and sensitivity analysis to develop a range of earnings outcomes.

There are instances in which technological advancement results in a new product that cannibalizes the demand for existing products. In such a case, a new demand forecast for the new product, combined with an expected cannibalization factor, is used to approximate the impact on future demand for the existing product.

It’s equally noteworthy that technological developments can affect the demand and supply of a product. The supply curve will move to the right if innovation results in lower manufacturing costs. Suppose innovation results in the development of better, more attractive products, demand for existing products will shift to the left.

Question

Which of the following factors would most likely be used to evaluate the impact of new products on existing products’ demand?

1. Cannibalization factor.
2. Sensitivity analysis.
3. Scenario analysis.

Solution

The correct answer is A.

The cannibalization factor is used to evaluate the impact of a new product on the future demand for an existing product. It quantifies a new product’s impact on an existing product’s sales.

B is incorrect. Sensitivity analysis is a tool that involves changing only one assumption at a time to determine its effect on the estimate of the intrinsic value.

C is incorrect. Scenario analysis is a tool that involves changing multiple assumptions simultaneously to determine their effect on the estimate of the intrinsic value.

Reading 17: Financial Statement Modeling

LOS 17 (l) Evaluate the effects of technological developments on demand, selling prices, costs, and margins.