Confidence intervals for optimal selection among alternatives with stochastic variable costs

Abstract

Traditional breakeven analysis assumes that the total cost curve is a linear function of fixed and variable costs, and the intersection of the cost curves or cost and revenue curves provides the optimal solution. The traditional approach is extended to a more realistic treatment by recognizing the uncertainty associated with the variable cost components: that variable costs have a random component and unit variable costs can be random variables, and a practical analytical approach for determining the probability of an alternative being the low-cost alternative at any production volume is presented.

Keywords:

• Breakeven analysis
• Cost–volume–profit analysis
• Risk management
• Decision-making