Cost-volume-profit (CVP) analysis examines the behavior of total revenues, total costs, and operating income as

changes occur in the units sold, selling price, variable cost per unit, or fixed costs of a product.

3-2 Describe the assumptions underlying CVP analysis.

The assumptions underlying the CVP analysis outlined in Chapter 3 are

1. Changes in the level of revenues and costs arise only because of changes in the number of product (or

service) units sold.

2. Total costs can be separated into a fixed component that does not vary with the units sold and a variable

component that changes with the number of units sold.

3. When represented graphically, the behaviors of total revenues and total costs are linear (represented as a

straight line) in relation to number of units sold within a relevant range and time period.

4. The selling price, variable cost per unit, and fixed costs are known and constant

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