CVP Analysis Assumes Volume Drives Cost Changes

Steps:

• Recall CVP analysis examines how costs, volume, and profits interact under varying activity levels.
• Identify core assumptions: fixed costs remain constant, variable costs vary proportionally with volume.
• Determine what triggers cost changes: only shifts in production/sales volume, not other factors.
• Match to options: costs change solely due to volume (option 3), excluding others.

Why D is correct:

• CVP's foundational assumption is that total costs vary linearly with activity volume, per the CVP model where total cost = fixed cost + (variable cost per unit × volume).

Why the others are wrong:

• A, B, C include options 1 and/or 2, which likely refer to irrelevant factors like price fluctuations or external events, not CVP's volume-only trigger.

Final answer: D