cost volume profit analysis assumptions

• All other variables remain constant
• CVP analysis assumptions


  • Volume is the only factor that will cause costs and revenues to change
  • Changes in other variables such as production efficiency, sales mix and price levels can have an important influence on sales revenue and costs
  • If significant changes in these other variables occur, the CVP analysis presentation will be incorrect and it will be necessary to revise the CVP calculations based on the projected changes to the other variables
• Single product or constant sales mix

  • CVP analysis assumes that either a single product is sold or, if a range of products is sold, that sales will be in accordance with a predetermined sales mix
  • When a predetermined sales mix is used, it can be depicted in the CVP analysis by measuring sales volume using standard batch sizes based on a planned sales mix
  • Any CVP analysis must be interpreted carefully if the initial product mix assumptions do not hold
• Total costs and total revenue are linear functions of output


  • The analysis assumes that unit variable cost and selling price are constant
  • This assumption is only likely to be valid within the relevant range of production
• Profits are calculated on a variable costing basis

  • The analysis assumes that the fixed costs incurred during the period are charged as an expense for that period
  • If absorption-costing profit calculations are used, it is necessary to assume that production is equal to sales for the analysis to predict absorption costing profits
• Costs can be accurately divided into their fixed and variable elements


  • CVP analysis assumes that costs can be accurately analysed into their fixed and variable elements
  • The separation of semi-variable costs into their fixed and variable elements is extremely difficult
  • A reasonably accurate analysis is necessary if CVP analysis is to provide relevant information for decision-making
• Analysis applies only to the relevant range


  • CVP analysis is appropriate only for decisions taken within the relevant production range
  • It is incorrect to project cost and revenue figures beyond the relevant range
• Analysis applies only to a short-term time horizon


  • CVP analysis is based on the relationship between volume and sales revenue, costs and profit in the short run, typically a period of one year
  • During this period significant changes cannot be made to selling prices and fixed and variable costs
  • CVP analysis thus examines the effects of changes in sales volume on the level of profits in the short run
  • It is inappropriate to extend the analysis to long-term decision-making