Question

In performing CVP analysis for a manufacturing company, what simplifying assumption is usually made about the volume of production and the volume of sales?

Short answer

Under the CVP analysis of a manufacturing firm,it is assumed that the sales volume of the business entity and the volume of units produced are equal.

Step-by-step solution

Definition of CVP Analysis

The financial analysis identifies the relationship between the business entity's cost, volume, and profit, known as CVP analysis. It includes the determination of the break-even point of the business entity and contribution margin.

Assumptions made in CVP analysis

While performing CVP analysis for a manufacturing company, the business entity is assumed to sell all the products produced.