An Integrated Cost-Volume-Market Value Analysis Under Uncertainty And Fixed Cost Effects

ABSTRACT

This paper develops an integrated model which explains and predicts relations among a firm's cost, production volume, and the market value of the firm in the presence of capital market equilibrium. It is assumed that the objective of the firm is either to maximise the market value of shareholders' equity or to accomplish the satisfactory level of the market value (i.e., the target value). The Sharpe-Lintner single-period capital asset pricing model is utilised to establish the linkage between a firm's market value and production-related variables. The following summarises the major results of this study. First, only when a firm faces no production risk is the profit-maximising output the same with the value-maximising output. Second, optimal production decisions under uncertainty depend not only on production- related variables but also on capital-market variables. Finally, under the value- maximising assumption, an increase (or decrease) in fixed costs has no effect on optimal production decisions. However, under the value-satisficing assumption, an increase in fixed costs leads to an increase (decrease) in production when a firm's production capacity is under-utilised (over-utilised).