Question

Lucia is using cost-volume-profit analysis to predict profits for a new product line. Which of the following reflect how Lucia’s analysis is subject to assumptions? (Check all that apply.)
When costs that are classified as variable actually are fixed costs, the analysis may lack validity.


If the inventory changes, the quantity used to calculate total variable costs is different than the quantity used to calculate total revenues.


The analysis lacks validity if the total fixed costs required for the calculated break-even point generate too low of capacity.


Because it is a new product line, and actual cost information is not available, Lucia cannot use cost-volume profit analysis.

Answer 1

Lucia’s analysis is subject to assumptions because(c) The analysis lacks validity if the total fixed costs required for the calculated break-even point generates too low of capacity.

Explanation:

Cost-volume-profit analysis is used to make short-term decisions.

Cost-volume-profit (CVP) analysis is used to study the changes in cost and volume and how its impact on the company's operating income and net income.

While  performing Cost-volume-profit (CVP) analysis  several assumptions are made like assuming the  Sales price per unit to be  constant. Variable costs per unit  to be constant.

The five basic component of CVP analysis includes

• volume or level of activity
• unit selling price
• variable cost per unit
• total fixed cost
• sales mix.