Question

Cost-volume-profit analysis is a technique available to management to understand better the interrelationships of several factors that affect a firm's profit. As with many such techniques, the account oversimplifies the real world by making assumptions. Which of the following is not a major assumption underlying CVP analysis?

a. All costs incurred by a firm can be separated into their fixed and variable components
b. the product selling price per unit is constant at all volume levels
c. operating efficiency and employee productivity are constant at all volume levels
d. for multi-product situations, the sales mix can vary at all volume levels

Answer 1

The incorrect assumption among those listed for CVP analysis is that the sales mix can vary at all volume levels in multi-product situations. CVP assumes a constant sales mix along with constant selling prices, and fixed cost and variable cost components.

Step-by-step explanation:

One of the major assumptions underlying Cost-Volume-Profit (CVP) analysis is not that for multi-product situations, the sales mix can vary at all volume levels. The correct assumptions for CVP analysis are: (a) all costs incurred by a firm can be separated into their fixed and variable components, (b) the product selling price per unit is constant at all volume levels, (c) operating efficiency and employee productivity are constant at all volume levels.

The assumption that is not a part of CVP analysis is (d) for multi-product situations, the sales mix can vary at all volume levels. Instead, CVP assumes that in multi-product companies, the sales mix is constant.