
Identify and briefly describe the assumptions of CVP.

Introduction:
Cost-volume profit analysis is a tool that helps in decision making by establishing a relationship between volume, price, variable cost, fixed cost and profit.
To identify and describe:
The assumptions of CVP.
Answer to Problem 1Q
The assumptions of CVP are:
- Linear cost and revenue function
- Cost can be categorized as either fixed or variable
- Only volume affects total cost and total revenue.
- Volume of production is equals to volume of sales
- Product mix is constant
Explanation of Solution
The assumptions of CVP are:
Linear cost and revenue function:
A straight line is used to describe the relationship between total cost and sales volume and total revenue and sales volume.
Cost can be categorized as either fixed or variable:
To find mixed cost, we must determine total fixed cost and variable cost per unit.
Only volume affects total cost and total revenue:
Other factors such as employee learning curve, productivity gains etc. are ignored.
Volume of production is equals to volume of sales:
It is assumed that There will not be any change in beginning or ending inventory, it is assumed that all the units produced are sold during a period.
Product mix is constant:
The companies dealing in multiple products assumes that units sold, or sales revenue generated from each product or service line remains constant.
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