Stochastic Cost-Volume-Value Model with Economic Demand and Cost Functions

The paper has set forth and developed a stochastic cost-volume-value (CVV) model with economic demand and cost functions. The model describes the relationship among cost, volume and value under uncertainty; and helps company managers conduct breakeven analysis in management decision-making and planning. Compared with the cost-volume-profit (CVP) model, the function of CVV model is EVA but not profits. Therefore, the model offset the limitation of the conventional CVP model which does not take the capital costs into consideration, and is more suitable for managers to make decisions in value creation. In reality, product prices and unit costs are related with volume. The model herein incorporates a linear demand function and a quadratic cost function. According to the stochastic CVV model, l.Explicit solution is found for the quantity which maximizes expected EVA. 2. The probability expression of expected EVA is found. 3. A specific expression which can be used for determining fixed cost is found, and then managers can choose activities which really create value for enterprises.