CVP Analysis Assumes Volume Drives Cost Changes

Steps:

• Identify core CVP assumptions: fixed costs remain constant, variable costs vary linearly with activity.
• Recognize that total costs change only when production/sales volume (activity level) alters variable costs.
• Eliminate other factors like price or fixed cost shifts, as CVP holds them constant for analysis.
• Match to options: only the volume-related factor (3) causes cost changes per CVP model.

Why D is correct:

• CVP definition assumes costs change solely due to volume fluctuations, as variable costs = variable cost per unit × volume.

Why the others are wrong:

• A: Includes irrelevant factors (1 and 2) beyond volume.
• B: Factor 1 (e.g., price changes) does not affect costs in CVP.
• C: Includes factor 2 (e.g., fixed cost changes), which CVP assumes constant.

Final answer: D