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CVP under Uncertainty and the Manager's Utility Function

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  • Kim, Sangphill
  • Abdolmohammadi, Mohammad J
  • Klein, Lawrence A

Abstract

Cost-volume-profit analysis has focused on the firm's short-run output decision assuming that the manager maximizes the firm's objective function rather than his or her own. This study argues that the decision problem facing the manager is to determine not only the level of output, but also the level of investment in risky assets in such a way that the expected utility of the manager's own end-of-period wealth can be maximized when the manager's wealth function is dependent on vested interests both within and outside of the firm, possibly in competition with the firm. Through analytical work, it is demonstrated that a change in fixed costs of the firm affects not only the production decision of a manager, but also his or her decision to invest in risky assets. The direction of this fixed cost effect depends on the particular type of risk aversion displayed by the manager. From the analytical work five propositions are developed for empirical investigation in the future. Copyright 1996 by Kluwer Academic Publishers

Suggested Citation

  • Kim, Sangphill & Abdolmohammadi, Mohammad J & Klein, Lawrence A, 1996. "CVP under Uncertainty and the Manager's Utility Function," Review of Quantitative Finance and Accounting, Springer, vol. 6(2), pages 133-147, March.
    • Handle: RePEc:kap:rqfnac:v:6:y:1996:i:2:p:133-47
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    Cited by:

    1. James A. Yunker & Dale Schofield, 2005. "Pricing training and development programs using stochastic CVP analysis," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 191-207.

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