SOME STATISTICAL ISSUES IN THE ESTIMATION OF A SIMPLE COST‐VOLUME‐PROFIT MODEL*

Abstract

ABSTRACTThis paper presents point and interval estimators of both long‐run and single‐period target quantities in a simple cost‐volume‐profit (C‐V‐P) model. This model is a stochastic version of the “accountant's break‐even chart” where the major component is a semivariable cost function. Although these features suggest obvious possibilities for practical application, a major purpose of this paper is to examine the statistical properties of target quantity estimators in C‐V‐P analysis. It is shown that point estimators of target quantity are biased and possess no moments of positive order, but are consistent. These properties are also shared by previous break‐even models, even when all parameters are assumed known with certainty. After a test for positive variable margins, Fieller's [6] method is used to obtain interval estimators of relevant target quantities. This procedure therefore minimizes possible ambiguities in stochastic break‐even analysis (noted by Ekern [3]).