Cost-volume-profit analysis and the value of information

Abstract

<p>In this paper, a new view point on cost-volume-profit analysis is presented. In contrast to the usual concern with the actual accept/reject decision, it is pointed out that, first, a decision must be made on the adequacy of the input data for use with the decision model. The use of the concept of the expected value of perfect information in this decision is described. In addition, the sensitivity of the decision variables to uncertainty in the input variables is investigated. Equations to be used for these two purposes are derived and illustrated for two types of probability distributions of the input data, the normal and lognormal distributions.</p>