Cost-Volume-Profit Assumptions:Relevant Range

The modified chart highlights the fact that tenuous, static assumptions underlie a graph of cost-volume-profit relationships. The sales and expense relationships may be valid only within a band of activity called the relevant range. The relevant range is usually u a range in which the firrn has had some recent experience. But the same relationships are unlikely to persist if volume falls outside the limits of the relevant range. some fixed costs may be avoided at low-volume levels.

Two principal differences between the accountant's and the economist's breakeven charts are:

1. The accountant usually assumes a constant unit variable cost instead of a unit variable cost that changes with the level of production. In other words, the accountant assumes linearity, but the economist does not.
2. The accountant's sales line is drawn under the assumption that price does not change with the level of production or sales, but the economist assumes that price changes may be needed to spur sales volume. Therefore, the economist's chart is nonlinear.

The economist's assumptions are undoubtedly more valid; the accountant’s simplifications may or may not lead to less-profitable decisions. The point is that obtaining more accurate cost functions is often difficult and expensive. Managers and accountants are aware of the simplifications introduced by the assumptions of linearitv, but generally they have decided that the value of any additional information that might be gained from more accurate data would not exceed the additional costs of obtaining the data. They also take comfort in knowing that most of their decisions.