For a cost-volume-profit (CVP) analysis to be effective, which of the following assumptions must generally hold true?

• A. Variable cost per unit increases as production volume increases.
• B. Inventory levels fluctuate significantly during the period.
• C. All costs can be accurately classified as either variable or fixed.
• D. Selling prices change frequently throughout the analysis period.

Answer: (C)

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 assumes that costs can be categorized as either fixed or variable, and it helps businesses make decisions about pricing, production levels, and cost management.
2. Review the assumptions required for CVP analysis: For CVP analysis to be effective, certain assumptions must hold true. These include: (1) All costs can be accurately classified as either fixed or variable, (2) Selling prices remain constant during the analysis period, (3) Variable cost per unit remains constant regardless of production volume, and (4) Inventory levels do not fluctuate significantly.
3. Analyze the given options: Evaluate each statement provided in the problem against the assumptions of CVP analysis. For example, 'Variable cost per unit increases as production volume increases' contradicts the assumption that variable costs per unit remain constant. Similarly, 'Inventory levels fluctuate significantly during the period' violates the assumption that inventory levels remain stable.
4. Identify the correct assumption: The statement 'All costs can be accurately classified as either variable or fixed' aligns with the fundamental requirement of CVP analysis. This classification is essential for calculating contribution margin and performing break-even analysis.
5. Conclude the reasoning: Based on the evaluation, the correct answer is the statement that supports the foundational assumption of CVP analysis, which is that all costs can be accurately classified as either variable or fixed.