Question

Which of the following are assumptions of cost-volume-profit analysis?



Multiple select question.

Costs are linear and can be accurately divided into variable and fixed elements.


In multi product companies, the sales mix is constant.


Fixed costs per unit stay the same within the relevant range.


Variable costs per unit increase over the relevant range of activity.

Answer 1

In cost-volume-profit (CVP) analysis, several key assumptions must be accepted for the analysis to be valid. The correct assumptions from your options are:

1. **Costs are linear and can be accurately divided into variable and fixed elements.**
2. **In multi-product companies, the sales mix is constant.**
3. **Fixed costs per unit stay the same within the relevant range.**

Thus, the fourth option, **"Variable costs per unit increase over the relevant range of activity,"** is incorrect because one of the assumptions is that variable costs per unit remain constant as production volume changes (within the relevant range).

So the valid assumptions for CVP analysis are:

- Costs are linear and can be accurately divided into variable and fixed elements.
- In multi-product companies, the sales mix is constant.
- Fixed costs per unit stay the same within the relevant range.