Which statement is a standard assumption of CVP analysis within the relevant range?

Which statement is a standard assumption of CVP analysis within the relevant range?

• A. Costs and revenues are highly non-linear and unpredictable.
• B. Costs and revenues behave linearly within the relevant range.
• C. The number of units produced has no impact on costs.
• D. The selling price per unit fluctuates with volume.

Answer: (B)

In CVP analysis, we treat costs and revenues as linear functions of volume within the relevant range. This means the selling price per unit is assumed to be constant, the variable cost per unit remains the same, and total fixed costs don’t change as output varies. With those assumptions, total revenue and total cost move in straight lines as volume changes, making profits change in a predictable way. If we move outside the relevant range, these relationships can become non-linear or step-like, which is why CVP relies on that linear behavior within the defined range. The other statements would contradict this approach: costs and revenues aren’t treated as highly non-linear; costs do depend on volume through variable costs; and the selling price per unit is not assumed to fluctuate with volume.

In CVP analysis, we treat costs and revenues as linear functions of volume within the relevant range. This means the selling price per unit is assumed to be constant, the variable cost per unit remains the same, and total fixed costs don’t change as output varies. With those assumptions, total revenue and total cost move in straight lines as volume changes, making profits change in a predictable way. If we move outside the relevant range, these relationships can become non-linear or step-like, which is why CVP relies on that linear behavior within the defined range. The other statements would contradict this approach: costs and revenues aren’t treated as highly non-linear; costs do depend on volume through variable costs; and the selling price per unit is not assumed to fluctuate with volume.