In break-even analysis, which of the following assumptions is made?

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

Answer: (B)

Verified step by step guidance

1. Understand the concept of break-even analysis: Break-even analysis is a financial tool used to determine the point at which total revenue equals total costs, resulting in no profit or loss. It assumes a linear relationship between costs, revenue, and production volume.
2. Review the assumptions of break-even analysis: One key assumption is that all costs can be classified as either fixed or variable. Fixed costs remain constant regardless of production levels, while variable costs change directly with the level of production.
3. Clarify why variable cost per unit does not increase with production: In break-even analysis, the variable cost per unit is assumed to remain constant as production increases. This is because the model simplifies cost behavior to make calculations straightforward.
4. Explain why inventory levels are not a focus: Break-even analysis assumes that production and sales are aligned, meaning inventory levels do not fluctuate significantly during the period. This simplifies the analysis and avoids complications from inventory management.
5. Discuss why selling price per unit is constant: Break-even analysis assumes that the selling price per unit does not change with the volume sold. This ensures a consistent revenue calculation and avoids complexities related to pricing strategies.