Final answer:
The underlying assumption of Cost-Volume-Profit (CVP) analysis relevant to the question is that unit costs remain the same over the relevant range (Option D). This reflects the CVP principle that both variable and fixed costs remain constant at different levels of production, a core aspect for decision-making in pricing and profit planning.
Step-by-step explanation:
The question relates to Cost-Volume-Profit (CVP) analysis, a managerial accounting technique that examines the impact of sales volumes, costs, and prices on profits. The underlying assumption is that unit variable costs and fixed costs remain constant regardless of the number of units produced. Consequently, when trying to identify which statement is an underlying assumption of CVP analysis one needs to consider which condition reflects this constancy premise.
Option A, suggesting an increase in inventories leads to higher fixed costs, does not align with the concept that fixed costs remain unchanged irrespective of output. Option C, which implies costs might be affected by factors other than changes in activity, also strikes contrary to the basic CVP assumptions. However, option B, concerning accurate cost classifications, and option D, about unit costs remaining constant over the relevant range, directly relate to CVP assumptions. The most fitting underlying assumption for CVP analysis is that unit costs remain the same over the relevant range (Option D), affirming a central principle of the CVP model that reflects its simplifying assumptions about cost behavior.
Understanding CVP is critical as it allows a firm to estimate the level of sales needed to cover costs (both fixed and variable), hence contributing to key decision-making processes like pricing, product selection, and profit planning. Hence, an accurate knowledge of cost behaviors, further divided into variable and fixed costs, forms the basis for a proper CVP analysis. While variable costs, such as labor and raw materials, fluctuate with production volume, fixed costs like rent do not vary with output in the short run.