A Generalized Stochastic Cost–Volume–Profit Model

Abstract

Cost–volume–profit (CVP) analysis is a widely used decision tool across many business disciplines. The current literature on stochastic applications of the CVP model is limited in that the model is studied under the restrictive forms of the Gaussian and Lognormal distributions. In this paper we introduce the Mellin Transform as a methodology to generalize stochastic modeling of the CVP problem. We demonstrate the versatility of using the Mellin transform to model the CVP problem, and present a generalization of the CVP model when the contribution margin and sales volume are both defined by continuous random distributions.