Key Assumptions of CVP Analysis

Steps:

• Identify core CVP assumptions: linearity in costs/revenues, constant selling price and variable cost per unit, and volume as the sole change driver.
• Assess statement 1: Incorrect, as CVP simplifies by ignoring other factors.
• Assess statement 2: Correct, aligns with constant per-unit prices and costs.
• Assess statement 3: Incorrect, contradicts constancy assumption.
• Assess statement 4: Correct, volume drives all changes in the model.

Why C is correct:

• CVP analysis assumes constant selling price and variable costs per unit (statement 2) and volume as the only factor affecting total costs/revenues (statement 4), enabling break-even calculations via formulas like Break-Even Point = Fixed Costs / (Selling Price - Variable Cost per Unit).

Why the others are wrong:

• A: Statement 1 violates CVP's simplification to volume-only changes.
• B: Statements 1 and 3 both contradict volume-only and constancy assumptions.
• D: Statement 3 assumes volume-driven changes in per-unit costs, opposing linearity.

Final answer: C