CVP Analysis under Uncertainty: A Log Normal Approach -- A Reply.

Abstract The article presents the authors' reply to comments on lognormal Cost-Volume-Profit (CVP) model. CVP model allows for dependent relationships among the input variables, large coefficients of variation and it permits a rigorous derivation of the distribution of the output random variable, profit. Authors feel that the model is an attractive and justifiable alternative to the normal model proposed by researchers R.K. Jaedicke and A.A. Robichek. The model is based on assumptions that quantity and contribution margin are lognormally distributed random variables and fixed costs are deterministic. Authors state that the richness of the model is reduced considerably due to the grouping of price and variable cost and the deterministic assumptions for fixed cost. Authors' second comment pertains to the desirability and intuitiveness of the lognormal assumptions. They discuss the relationship between the coefficient of variation and skewness, deriving the mathematical relationship in an equation.