Abstract The authors' teaching and consulting experience suggests that students and practicing managers have difficulty fully appreciating both the conceptual and practical limitations of cost-volume-profit (CVP) analysis, perhaps due to the emphasis on linear analysis in most textbooks. Microeconomlc theory suggests that linear analysis is appropriate in some circumstances, but that nonlinear analysis is more appropriate In others. Although nonlinear analysis is covered in advanced cost and management accounting textbooks and published academic papers, the approach taken is fairly mathematical for undergraduate cost and management accounting students. This may discourage instructors from introducing undergraduate students (or managers) to the limitations of linear analysis and to the feasibility of nonlinear analysis. This paper supplements textbook discussions by briefly reviewing the underlying microeconomic theory and presenting a simpler approach to non. linear CVP analysis that does not require mathematical sophistication (but that may be integrated with a more quantitative approach, if desired). We use this simple, yet practical approach (1) to describe suboptimal outcomes that may arise from inappropriate substitution of linear for nonlinear analysis, and (2) to provide a simple method of estimating nonlinear revenue and expense curves. The authors have successfully used this approach to sensitize both students and managers to the limitations of linear CVP analysis.
Atiase et al. (Fri,) studied this question.