Under the assumptions used in cost-volume-profit analysis, as the activity increases:

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BlackTom AI · Accepted Answer

Here’s the question restated for clarity: Under the assumptions used in cost-volume-profit analysis, as the activity increases:

Options:
- a. Variable cost per unit and total variable cost remain same
- b. Fixed cost increases in proportion to the activity increases
- c. Variable costs per unit increases in proportion to the activity increases.
- d. The total of fixed cost remains the same but the fixed cost per unit decreases within relevant range.

Now, let’s evaluate each option in turn.

Option a: Variable cost per unit and total variable cost remain same.
- In CVP analysis, variable costs are typically assumed to change in direct proportion to activity (they are variable with respect to the level of output). Therefore, the total variable cost should change as activity changes, not remain the same. This makes option a incorrect because it misstates the behavior of variable costs with volume.

Option b: Fixed cost increases in proportion to the activity increases.
- Fixed costs, by definition, do not change with the level of activity within the relevant range. They are incurred even if production is zero and do not scale with volume in the short run. Therefore, stating that fixed costs increase with activity contradicts the core CVP assumption. This option is incorrect because it confuses fixed costs with variable costs.

Option c: Variable costs per unit increases in proportion to the activity increases.
- Variable cost per unit is typically constant within the relevant range; total variable cost changes with quantity, but the per-unit variable cost does not automatically rise as activity grows. If anything, the per-unit variable cost remains the same, so this option mischaracterizes the standard CVP behavior. Hence, option c is incorrect.

Option d: The total of fixed cost remains the same but the fixed cost per unit decreases within relevant range.
- This statement aligns with CVP analysis: fixed costs do not change in total within the relevant range, so total fixed cost remains constant as activity changes. As activity increases, the fixed cost per unit (per unit of output) falls because the same total fixed cost is spread over more units. This is a correct description under CVP assumptions. Therefore, option d is correct.

In summary, option a incorrectly claims variable costs stay constant, option b incorrectly asserts fixed costs rise with activity, option c wrongly states variable cost per unit rises with activity, and option d correctly describes the fixed-cost behavior within the relevant range. The reasoning hinges on the standard CVP distinctions between fixed and variable costs and the concept of fixed cost spreading over more units as activity expands.

MCD2150 - T3 - 2025 Week 10 Workshop 1 Quiz

Under the assumptions used in cost-volume-profit analysis, as the activity increases:

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Similar Questions

The CVP and break-even analysis are supported by a range of important assumptions. Which of the following is not an assumption of the CVP:

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You sell a pizza for $20 and it costs you $15 to make it. If your fixed costs are $80,000 and you aim to make a net income of $4’500 this month, how much must your dollar sales be? Assume your tax rate is 30%.

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Which of the following scenarios would make CVP analysis LESS reliable for management decision-making?

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