Limitations of Break-Even Analysis

  1. Break-even analysis is based on the assumption that all costs and expenses can be clearly separated into fixed and variable components. In practice, however, it may not be possible to achieve a clear-cut division of costs into fixed and variable types.
  2. It assumes that fixed costs remain constant at all levels of activity. It should be noted that fixed costs tend to vary beyond a certain level of activity.
  3. It assumes that variable costs vary proportionately with the volume of output. In practice, they move, no doubt, in sympathy with volume of output, but not necessarily in direct proportions..
  4. The assumption that selling price remains unchanged gives a straight revenue line which may not be true. Selling price of a product depends upon certain factors like market demand and supply, competition etc., so it, too, hardly remains constant.
  5. The assumption that only one product is produced or that product mix will remain unchanged is difficult to find in practice.
  6. Apportionment of fixed cost over a variety of products poses a problem.
  7. It assumes that the business conditions may not change which is not true.
  8. The break-even analysis does not take into consideration the amount of capital employed in the business. In fact, capital employed is an important determinant of the profitability of a concern.
  9. It assumes that production and sales quantities are equal and there will be no change in opening and closing stock of finished product, these do not hold good in practice

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