Final answer:
CVP analysis requires costs to be categorized as either fixed or variable. These categories allow for insights from measures like average total cost, average variable cost, and marginal cost, which are critical for a firm's economic decisions.
Step-by-step explanation:
The categorical requirement of CVP analysis is that costs are divided into either fixed or variable costs. This differentiation facilitates further analysis as it leads to insights provided by different measures such as average total cost, average variable cost, and marginal cost.
Fixed costs refer to expenses that do not change with the level of production, like rent for factory space. On the other hand, variable costs vary with the level of production, such as the cost of raw materials. These distinctions help a firm in making important economic decisions by understanding the behavior of overall costs relative to the activity level.
Average total cost is calculated by dividing the total costs by the number of units produced, providing a per-unit cost metric. Average variable cost is found by dividing variable costs by the number of units produced. Marginal cost is the cost of producing one additional unit. All these costs provide critical data for decision-making in a firm.