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

• A. Selling price per unit changes with volume.
• B. Variable cost per unit increases as production increases.
• C. Inventory levels fluctuate significantly during the period.
• D. All costs can be classified as either variable or fixed.

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 how changes in costs, sales volume, and price affect a company's profit. It relies on certain assumptions to simplify the analysis.
2. Review the assumptions of CVP analysis: One key assumption is that all costs can be classified as either variable or fixed. This means costs are categorized based on their behavior in relation to changes in production or sales volume.
3. Evaluate the incorrect options: Selling price per unit changes with volume is not an assumption of CVP analysis; CVP assumes selling price remains constant. Similarly, variable cost per unit increasing as production increases contradicts the CVP assumption that variable costs per unit remain constant. Inventory levels fluctuating significantly is also not part of CVP assumptions, as CVP assumes inventory levels remain stable.
4. Focus on the correct assumption: The correct assumption is that all costs can be classified as either variable or fixed. This simplifies the analysis by allowing the calculation of contribution margin and break-even point.
5. Apply this understanding to solve similar problems: When analyzing CVP-related questions, always verify whether the assumptions align with the principles of CVP analysis, such as constant selling price, constant variable cost per unit, and stable inventory levels.