Final answer:
In CVP analysis, the assumption that variable costs per unit remain constant is correct, while the idea that fixed costs vary with production is incorrect. Total costs do not change proportionally with activity due to the fixed cost element, and marginal revenue exceeding marginal cost is not an assumption but a profit maximization condition.
Step-by-step explanation:
Cost-Volume-Profit (CVP) analysis is a tool that helps firms understand how changes in costs, volume, and price affect a company's profit. Within CVP analysis, certain assumptions are commonly made to create a reliable model to work from. Let's evaluate the assumptions provided in the question.
a) Fixed costs vary with production. This statement is not an assumption of CVP analysis. In fact, fixed costs are assumed to stay constant regardless of the level of production or sales volume.
b) Variable costs per unit remain constant. This is a correct assumption of CVP analysis. Variable costs per unit are considered to be constant within the relevant range of activity for which the CVP analysis is being conducted.
c) Total costs change proportionally with activity. This assumption is partially true; it applies to variable costs which do change in proportion to activity. However, fixed costs remain constant, and therefore, total costs will not change proportionally due to the fixed cost component.
d) Marginal revenue exceeds marginal cost. This is not an assumption of CVP analysis, but rather a condition for maximizing profit. The essence of CVP is to determine the level of activity (volume) at which total revenue equals total costs (the break-even point), or where it exceeds total costs (profit area).
So, the only correct assumption of CVP analysis among the options provided is 'b) Variable costs per unit remain constant.' Remember that CVP analysis is most accurate within the relevant range and is based on a long-run perspective on a firm's cost structure.