Integration of Uncertainty in Profit Planning: A Current Application

Abstract

Use of cost-volume-profit analysis for actual planning is often limited by an inability to properly incorporate uncertainty in the analysis when assumptions about known price and costs do not hold. We use currently available analysis software (MAPLE) in this study to demonstrate that uncertainty can be incorporated in Cost-Volume-Profit analysis and planning in practice. We show in our examples that expected selling price and variable cost changes have greater influence on expected breakeven sales levels than the impact of the standard deviations of selling price and variable cost. In particular, decreases in the expected selling price are shown to lead to significantly sharp declines in the expected breakeven quantity. By contrast, when the standard deviations of selling price or variable costs increase, only proportionate increases in the breakeven quantity are observed.