Confidence intervals for optimal selection among alternatives with stochastic variable costs |
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Authors: | B. Finch S. Gavirneni |
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Affiliation: | 1. Department of Management , Richard T. Farmer School of Business , Miami University , Oxford, OH 45056, USA finchbj@muohio.edu;3. Johnson Graduate School of Management , Cornell University , Ithaca, NY 14853, USA |
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Abstract: | Traditional breakeven analysis assumes that the total cost curve is a linear function of fixed and variable costs, and the intersection of the cost curves or cost and revenue curves provides the optimal solution. The traditional approach is extended to a more realistic treatment by recognizing the uncertainty associated with the variable cost components: that variable costs have a random component and unit variable costs can be random variables, and a practical analytical approach for determining the probability of an alternative being the low-cost alternative at any production volume is presented. |
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Keywords: | Breakeven analysis Cost–volume–profit analysis Risk management Decision-making |
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