Limitations of break-even analysis

Break-even analysis looks to be a very valuable and useful aid to decision making. Certainly, break-even charts are relatively easy to build and carry out managers with info on break-even forecasts, margins of safety and profit and also loss at various output levels. Manipulation that break-even charts can be used to answer; "what if?" questions and also can be component of a strategy analysis, including the setup of prices and also establishing the source levels required to struggle target profits.

However, there space a variety of limitations of break-even analysis.

You are watching: Which of the following is a limitation of break-even analysis?

Evaluation of break-even analysis

Examiners favor break-even inquiries as castle are relatively easy come set, and require student to show numeracy skills. However, over there are numerous assumptions in the break-even process that might limit its usefulness:

All calculation is sold: break-even functions on the basis that all calculation is turned right into sales revenue. In reality, that company will have stocks the unsold items at any one time, unless they deserve to work top top a completely just-in-time basis.One product and also price: most businesses sell an ext their products at various prices in various markets and to different customers. Customers that buy in bulk, for instance will be licensed has been granted to a discount. Break-even ignores all economies of scale.Straight line costs and revenue curves: if a firm is compelled to take on lower price at higher output since the industry is coming to be saturated, climate the revenue curve will certainly not be a right line. Likewise a firm"s typical variable prices are likely to be lower at greater outputs as it can negotiate a discount native its suppliers. The straight line presumption also method that semi-variable prices are assumed come be directly proportional come output and also in essence are simply lumped together with other variable expenses - in truth the term semi-variable is not offered at all.
A static model
where variables readjust independently of every other: in reality, the service world is dynamic and also any boost in output and any change in expenses is most likely to affect on price levels. Break-even, favor a balance paper is just a photo of a situation at a details point. Enhancing shortages of energy, because that example, will an outcome in some far-reaching increases in both variable and also fixed costs.Not all prices can be easiliy classified as resolved or variable.The result is no an ext accurate than the accuracy the the original data the is based on.It ignores all factors other 보다 costs and also revenues: production is also affected by the accessibility of finance, people and also management influences, competitive activity etc. For example, maximising production might place too much pressure ~ above staff and may require existing employees to work-related overtime, so an altering the cost base.Reactions that competitors: break-even evaluation ignore the reality that competitors may adjust their products/and or prices.

These assumptions mean the break-even analysis is just valid over a little range that outputs or sales and with solitary product firms.


Multi-product firms

What happens when a certain makes more than one product? Let"s look in ~ an example:

Maze environment-friendly Yachts Ltd

This firm has been collection up to produce a brand-new plastic fun boat. The expense profile is offered below.

Fixed costs per month: $100 000Variable expenses per boat: $100Selling price that boat: $300



Now draw the break-even chart, and also then click graph to see if girlfriend have acquired it correct.

See more: Determine The Interest Payment For The Following Three Bonds. (Assume A $1,000 Par Value.)

Now the service expands and also introduces a brand-new model. The expense profile is now:

Fixed costs per month $150,000Variable costs boat A: $120 per boat, boat B: $160Price watercraft A: $350, boat B: $460

If you try and draw the charts, you will hit a trouble instantly: exactly how to decision on i beg your pardon fixed costs go with which boat. Girlfriend cannot work-related this the end accurately, so girlfriend cannot attract break-even charts. This is a significant drawback the break-even charts and also analysis, as it yes, really only uses to solitary product firms.

Some this firm may pick to apportion these costs using full-costing or absorption costing and conduct as different break-even for each boat. The result may be quite inaccurate and is just as good as the an approach used to apportion the costs.