Which of the following is an assumption of cost-volume-profit (CVP) analysis?

• A. Variable cost per unit increases as production increases.
• B. Sales price per unit changes with volume.
• C. All costs are considered variable in CVP analysis.
• D. Total fixed costs remain constant within the relevant range.

Answer: (D)

Verified step by step guidance

1. Understand the concept of Cost-Volume-Profit (CVP) analysis: CVP analysis is a method used to understand the relationship between costs, sales volume, and profit. It helps businesses make decisions about pricing, production levels, and cost management.
2. Review the assumptions of CVP analysis: CVP analysis is based on several key assumptions, including that total fixed costs remain constant within the relevant range, variable costs per unit remain constant, and sales price per unit does not change with volume.
3. Clarify the relevant range: The relevant range refers to the range of activity within which the assumptions of CVP analysis hold true. Outside this range, fixed costs or variable costs may change, invalidating the analysis.
4. Eliminate incorrect options: Analyze each option provided in the question. For example, 'Variable cost per unit increases as production increases' is incorrect because CVP assumes variable costs per unit remain constant. Similarly, 'Sales price per unit changes with volume' is incorrect because CVP assumes a constant sales price per unit.
5. Identify the correct assumption: Based on the assumptions of CVP analysis, the correct answer is 'Total fixed costs remain constant within the relevant range,' as this aligns with the foundational principles of CVP analysis.