3. Assumptions of CVP Model
Costs can be bifurcated into variable &
fixed components.
Fixed cost will remain constant during the
relevant volume range.
Variable cost per unit will remain constant
during the relevant volume range.
4. Selling price per unit will remain constant
irrespective of the quantity sold within the
relevant range.
In the case of multi-product companies, in
addition to the above assumptions, it is
assumed that the sales-mix remains constant.
Finally, production and sales volumes are
equal.
5. Utility of the Model in Management
Decision Making.
1) Describe volume, revenues, costs, and profits:
Values at breakeven or target profit :
Units sold.
Revenues.
Variable, fixed, and total costs.
6. Sensitivity of results to changes in:
Levels of activity
Selling price
Cost function
Sales mix
7. Indifference point between alternatives.
Feasibility of planned operations.
2) Assist with plans and decisions such as:
Budgets
Discretionary expenditures
Product emphasis such as advertising.
8. Selling price .
Proportions of fixed.
Production or activity levels versus variable
costs.
Employee work schedules.
Raw material purchases.
9. 3) Monitor operations by comparing
expected and actual:
Volumes, revenues, costs, and profits
Profitability risk.
