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Cost-Volume-Profit Analysis

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What are some of the critical assumptions behind Cost-Volume-Profit Analysis and why is CVP typically used by organizations more often than time value money tools?

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The assumptions in C-V-P- analysis are:
1. Costs can be separated into fixed and variable components.
2. Fixed costs remain fixed and variable costs per unit do not change.
3. When performing multiproduct C-V-P, an important assumption is that the mix
remains constant.
4. Only one (1) driver - number of output units (which is the revenue and cost driver)
5. Total revenues and total costs are linear within the relevant range
6. Can ignore the time value of money effects
7. Units made = units sold

Cost-Volume-Profit (CVP) Analysis is a set of analytical tools used to determine the revenues required at any desired profit level. CVP analysis is based on a model of the relationship between three factors. 1. ...

Solution Summary

Cost-Volume-Profit Analysis is achieved.

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