Question

CVP analysis relies on all of the following assumptions except:

a) Linear revenue and cost functions
b) Constant selling price per unit
c) Fixed costs remain constant
d) Variable costs vary proportionally with activity

Answer 1

CVP analysis assumes that fixed costs remain constant, variable costs vary proportionally with activity, and there is a constant selling price per unit. Therefore, the assumption that 'Fixed costs remain constant' is not an exception to CVP analysis but is actually a correct assumption.

Step-by-step explanation:

CVP (Cost-Volume-Profit) analysis relies on several foundational assumptions to maintain its viability and accuracy in assessing a company's cost structure and profit potential. There is one statement, in particular, that is not an assumption of CVP analysis: Fixed costs remain constant. This is indeed an assumption of CVP analysis. On the other hand, CVP analysis assumes that variable costs vary proportionally with activity—true to the definition—and that there is a constant selling price per unit and a linear relationship between revenue and cost functions. Hence, all the assumptions listed except for 'Fixed costs remain constant' are accurate; since it is not an exception but rather an integral part of the CVP analysis.