Stochastic CVP Analysis with Economic Demand and Cost Functions

Stochastic CVP Analysis with Economic Demand and Cost Functions The analysis focuses on key concepts associated with the extensive CVP under uncertainty literature which has developed since the seminal contribution by Jaedicke and Robichek (1964). For the most part the previous literature has not incorporated economic functions relating production quantity to price and/or average cost. This model developed herein incorporates a linear demand function and a quadratic average cost function. Explicit solutions are found for five “special quantities”: (1) the lowest quantity which sets breakeven probability equal to the minimum acceptable level, (2) the quantity which maximizes breakeven probability, (3) the quantity which maximizes a Cobb-Douglas utility function defined on expected profits and breakeven probability, (4) the quantity which maximizes expected profits, and (5) the highest quantity which sets breakeven probability equal to the minimum acceptable level. Comparative statics effects are determined of the various model parameters on the five special quantities. A “CVP possibilities graph” is developed showing attainable combinations of expected profits and breakeven probability. Possible applications of the model are discussed. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Stochastic CVP Analysis with Economic Demand and Cost Functions

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2001 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1017921620718
Publisher site
See Article on Publisher Site

Abstract

The analysis focuses on key concepts associated with the extensive CVP under uncertainty literature which has developed since the seminal contribution by Jaedicke and Robichek (1964). For the most part the previous literature has not incorporated economic functions relating production quantity to price and/or average cost. This model developed herein incorporates a linear demand function and a quadratic average cost function. Explicit solutions are found for five “special quantities”: (1) the lowest quantity which sets breakeven probability equal to the minimum acceptable level, (2) the quantity which maximizes breakeven probability, (3) the quantity which maximizes a Cobb-Douglas utility function defined on expected profits and breakeven probability, (4) the quantity which maximizes expected profits, and (5) the highest quantity which sets breakeven probability equal to the minimum acceptable level. Comparative statics effects are determined of the various model parameters on the five special quantities. A “CVP possibilities graph” is developed showing attainable combinations of expected profits and breakeven probability. Possible applications of the model are discussed.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 3, 2004

References

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