Answer
The assumptions underlying Cost-Volume-Profit (CVP) analysis are as follows:
Changes in revenues and costs are driven by changes in the number of units sold.
Costs can be separated into fixed and variable components.
Total revenues and total costs behave linearly in relation to units sold within a relevant range.
Selling price, variable cost per unit, and total fixed costs are known and constant.
These assumptions simplify CVP analysis, but the classification of costs as variable or fixed can vary based on the time horizon and specific decision context.
Work Step by Step
The assumptions underlying Cost-Volume-Profit (CVP) analysis are as follows:
Changes in revenues and costs are driven by changes in the number of units sold.
Costs can be separated into fixed and variable components.
Total revenues and total costs behave linearly in relation to units sold within a relevant range.
Selling price, variable cost per unit, and total fixed costs are known and constant.
These assumptions simplify CVP analysis, but the classification of costs as variable or fixed can vary based on the time horizon and specific decision context.
