You were talking to your roommate one day about CVP analysis and the approaches that are used to...

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You were talking to your roommate one day about CVP analysis and the approaches that are used to calculate the break-even point. You also described the assumptions that underlie this type of analysis.
Your roommate proclaimed, ?oWow, you people in accounting are pretty simple. Do you realize how unrealistic it is to assume that, no matter how many units you sell, you will realize the same price per unit? And, I’ve never heard any serious person suggest that costs are linear. How can you possibly state that assumption with a straight face? In your world, profit maximization is simple . . . just produce the maximum amount possible.??
Provide a written justification of the assumptions accountants make in conducting CVP analysis that will satisfy your critical economist roommate.

David · Accepted Answer

Assumptions of Cost Profit Volume Analysis 
Cost profit Volume analysis has certain inherent assumption associated with it which makes it 
difficult to apply in practical scenarios and limit the scope of its use for theoretical studies. Basic 
assumptions of Cost Profit Volume analysis are: 
Fist assumption is that Cost Volume Profit Analysis assumes that all the cost involved in running 
a business can either be classified as fixed or variable. This is not true in practical situations there 
are certain costs which are partially fixed and partially increases with the level of production and 
it may be difficult to determine the percentage of fixed and variable cost in the total cost. In such 
cases cost volume profit analysis might not be able to predict exact breakeven point. Example of 
such cost is cost incurred in paying electricity bill of a factory is partly fixed and rest depend on 
the electricity consumed which increases with increase in number of units manufactured. Cost 
Profit Volume Analysis does not accommodates such cost in its analysis. (Garrison, R. H., 
Noreen, E. W., & Brewer, P. C.

You were talking to your roommate one day about CVP analysis and the approaches that are used to calculate the break-even point. You also described the assumptions that underlie this type of analysis....

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