Question

“CVP analysis is both simple and simplistic. If you want realistic analysis to underpin your decisions, look beyond CVP analysis.” Do you agree? Explain.

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asked 2021-06-17
“CVP analysis is both simple and simplistic. If you want realistic analysis to underpin your decisions, look beyond CVP analysis.” Do you agree? Explain.

Answers (1)

2021-06-18
The CVP analysis is limited by the assumptions mentioned in the question 2 of this chapter and that makes it simplistic. One of the assumptions is that: costs will either fall under variable or fixed costs, but in reality some costs will be mixed. It also says that variable and fixed costs are known and constant which also in reality will not always be the case. Sometimes variable costs won't change proportionally and fixed even though they are fixed they will also change with time.
Although the CVP analysis is simplistic it can give a very good estimate and can be very useful especially when making short term desicion.
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