Which of the following statements is most correct with respect to the assumptions of the cost volume profit model?

A) The assumptions of the model are realistic.
B) The assumptions of the model are unrealistic, and therefore the model has little usefulness.
C) It is not possible to state whether the assumptions of the model are realistic or unrealistic.
D) The assumptions of the model are unrealistic, but the model has great usefulness in certain circumstances, as evidenced by its use in practice.

Question

Lexie Nicola · Accepted Answer

Final Answer : D, Explanation :  The assumptions of the cost volume profit model, such as a linear relationship between sales volume and costs and fixed selling price, may not be entirely realistic in all situations. However, the model has proven to be immensely useful in practice as a tool for analyzing the effects of changes in volume, pricing, and cost structure on profitability. Thus, while the assumptions may be unrealistic, the model still has great value in certain circumstances.

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