Question

Discuss the limitations of break-even analysis in production and how to overcome these limitations.

Answer 1

LIMITATIONS OF BREAK EVEN ANALYSIS ARE AS FOLLOWS

1. Unrealistic assumptions:- - Products will not be sold at the same price at different output levels; fixed costs will vary with changes in output

2.Sales may not be same as the output:-

- some stock build-up or waste output may also occur

3.Variable cost will not be always the same:-

- This means that, as the production increases , the company will purchase inputs at lower rates (buying power), thus lowering variable cost per unit.

4.Most companies market more than one product and it becomes more difficult to calculate breakeven for a company

5. Break-even analysis should not be used as a decision-making method but rather as a planning aid.

METHODS TO OVERCOME IT

1.Use it as a supporting tool :-

- Use Break even analysis as a suporting tool and do not depend entirely on it.

2. Use under normal business conditions only:

This means not using the values in decreasing market conditions and product seasons. We can't foresee it at this point

3. Make product wise calculations:-

Some companies sell more than one product, so these Companies measures product wise break even analysis.

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