Core Assumptions of CVP Analysis

Steps:

• Recall that CVP analysis assumes costs and revenues behave linearly within the relevant range.
• Identify key assumptions: fixed costs remain constant in total, variable costs per unit are constant, and sales mix is unchanged for multi-product scenarios.
• Match choices to standard assumptions: option 2 aligns with fixed costs constancy, option 4 with constant sales mix.
• Eliminate mismatched pairs by verifying against CVP model's foundational requirements for break-even and profit calculations.

Why D is correct:

• CVP relies on fixed costs being constant (assumption 2) and constant sales mix (assumption 4) to ensure accurate profit-volume relationships, as per the basic CVP formula: Profit = (Sales - Variable Costs) - Fixed Costs.

Why the others are wrong:

• A includes 1 (linear behavior, but incomplete without fixed/variable split) and misses sales mix.
• B pairs 1 (linearity) with 4 (sales mix), but omits essential fixed costs constancy.
• C combines 2 (fixed costs) with 3 (often production=sales, not always core for basic CVP).

Final answer: D