Question

CVP analysis relies on all of the following assumptions except:

a. Sales mix remains constant
b. Variable costs per unit remain constant
c. Fixed costs remain constant
d. Total costs remain constant

Answer 1

CVP analysis assumes constant sales mix, variable costs per unit, and fixed costs, but not constant total costs, as total costs vary with output levels.

Step-by-step explanation:

CVP analysis, or Cost-Volume-Profit analysis, assumes that the sales mix remains constant, variable costs per unit remain constant, and fixed costs remain constant over a specified range of output. However, it does not assume that total costs remain constant—since total costs are composed of both fixed and variable costs, they will change as the level of output changes.

An understanding of average total cost, average variable cost, and marginal cost is essential in breaking down total costs into fixed and variable components, which then feeds into the CVP analysis.