Total costs and activity are assumed to have a linear relationship within the relevant range.

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The assumption of linearity within the relevant range is a fundamental principle of cost-volume-profit analysis, which is used to analyze the relationship between costs, activity levels, and profits. This assumption implies that the total costs of a business can be subdivided into fixed and variable components, and that the variable costs are directly proportional to the level of activity (such as units produced or service hours provided). As the activity level increases or decreases, the total costs will increase or decrease in a linear manner. This assumption is often useful for making short-term decisions and setting prices, but it may not hold true in all situations, such as when there are economies or diseconomies of scale, capacity constraints, or step costs.

Total Costs and Activity Are Assumed to Have a Linear