The correct answer is: D. Value of goods and wages are immutable/constant.
Cost-volume-profit (CVP) analysis is a tool that helps businesses understand the relationship between their costs, volume of sales, and profits. It is based on the following assumptions:
- The sales mix of the products remains constant. This means that the percentage of each product that is sold remains the same.
- Quantity of stock is variable from year to year. This means that the amount of inventory that a business holds can change from year to year.
- Income and cost are linear within the prescribed limits. This means that the relationship between income and costs is a straight line within a certain range of activity.
- Value of goods and wages are immutable/constant. This means that the prices of goods and wages do not change.
The assumption that the value of goods and wages are immutable/constant is not always realistic. The prices of goods and wages can change due to a number of factors, such as inflation, changes in demand, and changes in supply. When the prices of goods and wages change, it can affect a business’s costs and profits.
For example, if the price of goods increases, a business’s costs will increase. This will lead to a decrease in profits, unless the business is able to pass on the increase in costs to its customers in the form of higher prices.
Similarly, if the price of wages increases, a business’s costs will increase. This will also lead to a decrease in profits, unless the business is able to increase productivity or reduce other costs.
Therefore, the assumption that the value of goods and wages are immutable/constant is not always realistic. When the prices of goods and wages change, it can affect a business’s costs and profits.