Asymmetries in Cost-Volume-Profit Relation: Cost Stickiness and Conditional Conservatism
54 Pages Posted: 20 Aug 2013
Date Written: March 3, 2013
Cost-volume-profit (CVP) analysis is based on a linear model of earnings behavior. However, recent research documents two potential sources of asymmetry in earnings: cost stickiness and conditional conservatism. We examine the implications of these asymmetries for CVP analysis and develop an “asymmetric CVP” (ACVP) framework incorporating both phenomena. ACVP estimates for Compustat/CRSP data reveal dramatic deviations from the standard CVP model (attributed to both stickiness and conservatism). These asymmetric deviations lead to major conceptual revisions in CVP analysis and have a large impact on various CVP benchmarks.
Keywords: resource adjustment costs, break even analysis, budgeting, managerial discretion
JEL Classification: C5, D2, L2, L23, M4, M46
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