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

Question

BlackTom AI · Accepted Answer

Question restatement: The prompt asks which scenario would render cost–volume–profit (CVP) analysis less reliable for management decision-making.
Option A: 'A company operating within its relevant range of activity' CVP analysis is most reliable when activity is within the relevant range, where per-unit costs and the cost behavior assumptions hold; therefore this scenario would not make CVP less reliable. In fact, it supports CVP usefulness.
Option B: 'A manufacturing firm with a stable product mix' A stable product mix aligns with CVP assumptions, since both the selling prices and cost behavior remain relatively constant; thus CVP would remain a dependable tool rather than being less reliable.
Option C: 'A business experiencing frequent changes in its sales mix of multiple products' Here the core CVP assumption is violated: CVP typically presumes a constant sales mix so that the weighted-average contribution margin remains stable. When the mix varies often, the overall contribution margin and break-even calculations become unreliable, as different products have different margins and the mix affects overall profitability unpredictably. This makes CVP analysis less dependable for decision-making.
Option D: 'An entity with clearly identifiable fixed and variable costs' Clear identification of fixed and variable costs strengthens CVP analysis, because the fundamental slope and break-even computations rely on this distinction; this scenario supports, rather than undermines, CVP reliability.

Synthesis of reasoning: The reliability of CVP hinges on stable cost behavior and a consistent sales mix. Scenarios with stable range and fixed/variable separation support CVP's assumptions, while frequent sales-mix changes disrupt the constancy required for accurate CVP results. Hence, the option describing frequent changes in sales mix is the one that would reduce CVP reliability.

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

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