Which of the following is not an assumption of conventional cost/volume/profit (CVP) analysis?
A. Total fixed cost is constant over the relevant range of activity. B. The sales mix is unchanged over the relevant range of activity. C. Total variable cost changes in direct proportion to changes in the level of activity over the relevant range. D. The variable cost per unit varies over the relevant range of activity. E. The total revenue function is linear within the relevant range.
To determine which of the given options is not an assumption of conventional cost/volume/profit (CVP) analysis, let's go through the basic assumptions of CVP analysis one by one:
1. Total fixed cost is constant over the relevant range of activity. - This means that the total fixed costs do not change as the level of production or sales changes within the relevant range. This is indeed an assumption of CVP analysis.
2. The sales mix is unchanged over the relevant range of activity. - This assumes that the proportion of different products being sold remains constant. For example, if a company sells two products, the percentage of total sales represented by each product does not change. This is also an assumption of CVP analysis.
3. Total variable cost changes in direct proportion to changes in the level of activity over the relevant range. - This means that variable costs vary directly with the change in production or sales volume. If the production doubles, the total variable costs will also double. This is another assumption of CVP analysis.
4. The variable cost per unit varies over the relevant range of activity. - This suggests that the variable cost per unit changes as the level of activity changes. However, conventional CVP analysis assumes that the variable cost per unit remains constant within the relevant range. So, this is not an assumption of CVP analysis.
5. The total revenue function is linear within the relevant range. - This means that total revenue increases proportionally with sales volume. This linear relationship is assumed in CVP analysis.
Given the explanations above, we can determine that the incorrect assumption, which is not a part of conventional CVP analysis, is:
The variable cost per unit varies over the relevant range of activity.
