Final answer:
Assumptions of cost-volume analysis include the constancy of fixed costs, variable costs changing in proportion to production output, and the known and constant nature of sales price per unit, variable cost per unit, and fixed costs.
Step-by-step explanation:
Assumptions of cost-volume analysis, also known as cost-volume-profit (CVP) analysis, are fundamental to understanding a firm's cost structure and making decisions about the profit-maximizing quantity to produce and price to charge. Key assumptions include:
- Fixed Costs remain constant regardless of the output level.
- Variable Costs change in direct proportion to the level of production output.
- Sales price per unit, variable cost per unit, and fixed costs are known and remain constant.
This form of analysis is critical for long-term production planning, as it allows firms to predict how changes in costs and sales levels affect profitability.