Question

With respect to fixed costs, CVP analysis assumes total fixed costs

a. per unit remain constant as volume changes
b. remain constant from one period to the next
c. vary directly with volume
d. remain constant across changes in volume

Answer 1

In CVP analysis, fixed costs remain constant regardless of changes in production volume, so the rent on property would be the same no matter the production level.

Step-by-step explanation:

In the context of Cost-Volume-Profit (CVP) analysis, total fixed costs are assumed to remain constant regardless of the production volume. When an organization does not produce anything, at zero production, fixed costs such as the rent on a factory or retail space, are still incurred. Even as production begins and increases, these fixed costs do not change — they are 'fixed' in the sense that they are not affected by the quantity of goods or services produced.

Therefore, the correct answer to the question is that total fixed costs 'remain constant across changes in volume', meaning that they do not fluctuate alongside the level of production. This is an essential assumption in CVP analysis as it helps in understanding how costs and profits will change with different levels of sales and production.