ICAEW BIP · Chapter 11 · Question 7 of 10
Which of the following is an assumption of basic cost-volume-profit analysis?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Selling price and variable cost per unit stay constant at all levels of activity
Explanation
CVP analysis assumes linear relationships: a constant selling price and variable cost per unit, fixed costs that stay the same within the relevant range, a constant sales mix where there is more than one product, and production equal to sales, so there is no change in inventory. These assumptions are also its main limitations.
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