Question

1. What is the underlying assumption for cost-volume-profit analysis?

        A.   Revenues and costs behave in a linear manner
        B. Costs can be categorized as variable, fixed, or semi-variable
        C.   Worker efficiency and productivity remain constant

        D.   All of these are assumptions that underlie cost-volume-profit analysis

Answer 1

Answer:

Option D (All of these are assumptions that underlie cost-volume-profit analysis) is the correct answer.

Explanation:

The following assumptions must be satisfied within the relevant range for any valid cost-volume-profit analysis:

1. There is a linear relationship between the behavior of total revenue and costs.

The above assumption implies the following:

a. Expenses can be classified as fixed, variable, or semivariable.

b. The efficiency and productivity of the production process and workers remain constant.

2. In multiproduct organizations, the sales mix remains constant.

3. In manufacturing firms, the inventory levels are the same throughout the period i.e., the number of units produced = number of units sold.