(a) ASSUMPPTION OF CVP ANALYSIS 1. All costs can be classified as fixed and variablewhile developing and applying cost-profit-analysis including the break-even analysis, it is assumed that all costs can be classified into fixed and variable costs. In fact, it is difficult to identify each and every cost element as fixed and variable. In the traditional type of recording costs, it is very difficult to segregate costs into fixed and variable. Moreover, the flexible policy of the company also makes it more difficult to identify the cost as fixed and variable.If anyone fails to identify the cost as fixed and variable, the application of cost-volume-profit analysis becomes almost impossible.

2. Behavior or costs will be linear within the relevant rangeCost-volume-profit (CVP) analysis assumes that total fixed costs do not change in the short-run within the relevant range. Total variable costs are exactly proportionate to sales volume. But in reality, cost behavior may not remain constant.

3. Difficulty of steps fixed costsRelevant range for many costs is very short. In that case it becomes very uncomfortable to compute the required volume because it is difficult to say that which the relevant range for our needed volume is.

4. Selling price remains constant for any volumeIndeed, most often quantity discount is offered for different lots of purchase. This causes difficulty in determining the contribution margin per unit(CMPU) and contribution margin ratio.

5. There is no significant change in the size of inventoryApplication of cost-volume-profit (CVP) analysis is possible only under following two situations:* Either the company should follow variable costing for the inventoriable product cost.* Or all the production volume should be sold within the same period.

6. Cost-volume-profit (CVP) analysis applies only to a short-term time horizonCVP analysis is a short term planning tool, because nothing remains stable in the long-run. In the condition of changing variables, all equations of CVP analysis need readjustment of figures.

(b) Six Key Purposes of Budgets

• A method of planning the use of resources

• A vehicle for forecasting

• A means of controlling the activities of various groups within the firm

• A means of motivating individuals to achieve performance levels agreed and set.

• A means of communicating the wishes and aspirations of senior management

• A means of resolving conflicts of interest between groups with the organization.

x y xy X2

500 80 40,000 250,000800 120 96,000 640,000700 100 70,000 490,000650 95 61,750 422,500650 94 61,100 422,500500 82 41,000 250,000640 90 57,600 409,60004,440 661 427,450 2,884,600

B= n ∑ xy - ∑ x ∑ y

n∑ (x2) – (x)2

(7*427,450) – (4,440*661) = 2,992,150 – 2, 934,840 = 57, 310

(7*2,884,600) – (4,440)2 20,192,200 – 19,713,600 478, 600

B = 0.1197

A=∑ y - b ∑ x = 661 – 0.1197(4,440) = 661 – 531.6 = 129.33 = 18.48

n 7 7 7

Y = 18.48 + 0.1197x

(ii) y = 18.48 + 0.1197(620)

=18.48+74.214

= sh 92.694

(7*427,450) – (4,440*661) = 2,992,150 – 2, 934,840

(7*2,884,600) – (4,440)2 -