Chapter 21, Problem 16DQ

To determine

Cost-volume profit analysis is a managerial accounting technique which is used to determine how changes in costs and volume affect a company’s operating income and net income.

In CVP analysis there are certain assumptions:

1. All units produced are sold. There is no closing inventory.
2. Sales price per unit, variable cost per unit and total fixed cost remains constant.
3. Costs are classified as either fixed cost or variable cost.

Fixed cost is the cost which remains same at each level of activity. It remains constant in totality at each level of production volume.

To determine:

In the given question, we have to explain that why the fixed costs shows as a horizontal line on a CVP chart.