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Two other assumptions are that total revenue and total expenses behave in a linear manner over the relevant range. These 2 are standard when Cost Volume Profit analysis is carried out.
2.
a) There is an extra $720,000 a year in fixed costs estimated by Fred Williams for this year. Since capacity is being expanded to increase production of Product C, it could be assumed that this increase should be allocated to this product. Production of Product A is to be scaled down, but as there isn't any information as to whether its relevant range of fixed costs will change, I have left its level of fixed costs unchanged...
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