Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 11

What are some important assumptions commonly made in CVP analysis. Do these assumptions impose serious limitations on the analysis? Why or why not?

Step 1 of 2

Cost-volume-profit (CVP) analysis relies on certain assumptions. Some of the key assumptions underlying Cost-volume-profit analysis are as follows:

All costs can be classified are fixed and variable costs

While developing and applying Cost-volume-profit (CVP) analysis including break-even analysis, it is assumed that all costs can be classified into fixed and variable costs.

Behavior or costs will be linear within the relevant change

Cost-volume-profit analysis assumes that total fixed costs do not change in the short-run within the relevant range. Total variable costs are exactly proportionate to sales volume.

Selling price remains constant for any volume

It is assumed in the Cost-volume-profit (CVP) analysis that the sales price per unit remains constant at any volume. It means the selling price per unit remains constant irrespective of number of units.

Cost-volume-profit (CVP) analysis applies to short-term planning

Cost-volume-profit (CVP) analysis is a short-term planning tool, because nothing remains constant in the long-run. In the condition of changing variables, all equations of Cost-volume-profit (CVP) analysis need readjustment of figures.

Sales mix is constant

It is assumed that in case of multiproduct companies, the sales mix is constant.