Assumptions made in cost-volume-profit analysis
To summarize, the most important assumptions underlying CVP analysis are:
•Selling price, variable cost per unit, and total fixed costs remain constant through the relevant range. This means that a company can sell more or fewer units at the same price and that the company has no change in technical efficiency as volume changes.
•In multi-product situations, the product mix is known in advance.
•Costs can be accurately classified into their fixed and variable portions.
Critics may call these assumptions unrealistic in many situations, but they greatly simplify the analysis.
This video review the components of the CVP Chart or graph.