Asymmetries in Cost-Volume-Profit Relation: Cost Stickiness and Conditional Conservatism

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.