To critique the assumptions of cost-volume-profit analysis

Instructions:

1. Watch video Critical Assumptions of Cost-Volume-Profit Modeling

Explain:The assumptions underlying CVP analysis are: The behavior of both costs and revenues are linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.) Costs can be classified accurately as either fixed or variable.

a. Among all assumptions in the video, which one do you think is the most critical? Explain.

b. How will you change the cost-volume-profit analysis if the assumption (you identify in the previous question) is not valid? Use a specific cost-volume-profit analysis (e.g., breakeven analysis) to explain.