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What is What-If Analysis? - Definition & Examples

What is What-If Analysis? - Definition & Examples
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  • 0:03 Definition of What-If Analysis
  • 1:35 Uses of What-If Analysis
  • 2:32 Example of What-If Analysis
  • 3:22 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting
In this lesson, we'll learn about what-if analysis. We'll define the term and apply it to a few examples. The lesson will conclude with a summary and a quiz.

Definition of What-If Analysis

Let's imagine that you and your friends decide to get together for the day. However, before the fun can begin, you must first decide what it is you'll be doing. Your friend Katy wants to go to the amusement park, while your friend Sara wants to go to the zoo. Tom wants to go biking, and Sam wants to catch a movie. While they are all great ideas, you know that there is a limit of how much money each of you are willing to spend. While biking costs nothing, the amusement park costs $25 per person, the zoo is $15 per person, and a movie is $10 per person. Because each of you only has $35 to spend for the day, you'll have to choose your activities accordingly. By looking at the different combinations of activities, you can determine which ones you can afford to partake in. What you and your friends are essentially doing is participating in what-if analysis.

So what is meant by the term, what-if analysis? Well, it is a way for a company, individual, or economist, to plug in different scenarios and values to determine a range of possible outcomes. This type of analysis is often done when data is limited and a company wants to make the most informed decision. Oftentimes, a software program like Microsoft Excel is utilized to plug different numbers into cells and see how they affect the outcome. Using our earlier example, you and your friends could combine various activities to see which combinations added up to $35 or less. This could help you make the best informed decision about how to spend your money for the day.

Uses of What-If Analysis

Obviously what-if analysis doesn't provide a guaranteed outcome, but it does provide a tool for companies to look at a range of plausible outcomes. It also allows a company to change the input data to see how it affects the outcome. This is beneficial when a company is trying to determine how much material or labor to apply to various aspects of its business. For example, a company might realize that if it hires 10 employees it can make 25 gadgets, but if it hires 15 employees it can produce 38 gadgets.

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