What is the Independent Variable?
Independent variable is an object or a time period or a input value, changes to which are used to assess the impact on an output value (i.e. the end objective) that is measured in mathematical or statistical or financial modelling.
Variable means something which will change as per available information. Independent variable means such information which is not dependent on any other input and is provided on a standalone basis. For example, the date of birth of a person is an independent variable for calculating the present age and it will not change on any factors. In financial modelingFinancial ModelingFinancial modeling refers to the use of excel-based models to reflect a company's projected financial performance. Such models represent the financial situation by taking into account risks and future assumptions, which are critical for making significant decisions in the future, such as raising capital or valuing a business, and interpreting their impact., it can be an assumption for the number of units sold or growth rateGrowth RateThe Growth rate formula is used to calculate the annual growth of the company for a particular period. It is computed by subtracting the prior value from the current value and dividing the result by the prior value. of sales or input for interest rate or a cost driver, etc.
Example of Independent Variable
Let’s consider an example of a famous company which sales its goods on a retail basis.
The impact of the said variable on the profit figures of the Company are as follows:
- Here the employee cost is dependent on the number of employees & average salary per employee.
- Total revenue is dependent on independent variables such as a number of employees, average sales per employee & diminishing return per employee.
- Rental cost is dependent on a number of stores & rental cost per store.
- Total expense is dependent on salaries & rental cost. Further, the profits are based on total revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions. & total expenseExpenseAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.. Similarly, profit % is based on other factors, which are further dependent on the independent variables.
We can consider the data as follows for the graph:
The independent variable is selling price. The impact of change in selling price on the amount of gross profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services. (i.e. dependent on selling price, direct costDirect CostDirect costs are costs incurred by an organization while performing its core business activity and can be attributed directly in the production cost, such as raw material costs, wages paid to factory staff, power & fuel expenses in a factory, and so on, but do not include indirect costs such as advertisement costs, administrative costs, etc. & number of units) is shown below:
- The gross profit here is directly on other factors.
- Any change in selling price affects the gross profit levels.
- Workplace – Independent variable can be used at workplaces wherein an employer needs to find whether providing different types of work to employees leads to increased satisfaction of their job profile or not. Such an experiment was conducted by providing a new set of work to one group of employees & a similar set of repeated work to other groups of employees. Here, providing the work (new/repeated) to employees is an independent variable. The outcome depends on the input provided.
- Health Research – It can be used in a health research centre where the doctors need to check the anxiety level/response of immunity to a new treatment for a set patient dealing with the same disease. For example, in the experiment conducted, the new treatment was given to one group of patients & another treatment given to another group of patients. Here, the type of treatment is an independent variable, which will provide the outcome (i.e. the level of anxiety in patients).
- Coaching Classes – Independent variable can also be used for a coaching classes environment wherein the coaching organisation wants to check whether the students become attentive in class if the colour of walls is changed from blue to light yellow. So, an experiment was conducted where one set of students were asked to study in blue coloured hall & another group was asked to study the same topic in a yellow coloured hall. Here, the colour type is an independent variable.
- School Administration – Independent variable can also be used in a school wherein the head-administrative wants to assess whether weekly extra-curricular (i.e. exercise) periods will help students to achieve more concentration in studies. So, in an experiment, one set of students were allowed weekly extra-curricular periods for 3 months & another set of students were not offered any such additional periods. The status depends on a quarterly test conducted in the school. Here, the extra-curricular periods are independent variables.
This has been a guide to Independent Variable and its definition. Here we discuss how it works along with examples and uses. You may learn more about financing from the following articles –