CEVAP:

The CVP analysis assumes constant costs and prices but in real life neither prices nor costs remain constant. Cost behaviour may change for higher volumes because of economies of scale and price reductions may have to be accepted for higher level of sales. Therefore, the suggested linear total cost and revenue functions can only be achieved within a very restricted activity range. The CVP analysis requires all costs to be split into their fixed and variable components however in reality most costs are mixed and the separation is not always easy and accurate. The CVP analysis is based on variable costing, however in financial reporting absorption costing is used. Absorption costing categorizes costs as inventoriable and period costs. Therefore, the CVP analysis also necessitates the assumption that all production is sold which does not hold in real life conditions. Finally, in a multi-product environment the CVP analysis assumes a constant sales mix, but again in real life situations companies may experience varying proportions in their product mix sales.