Limitations
- Break-even analysis is only a supply side (i.e. costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices.
- It assumes that fixed costs (FC) are constant. Although this is true in the short run, an increase in the scale of production is likely to cause fixed costs to rise.
- It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales. (i.e. linearity)
- It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e., there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period).
- In multi-product companies, it assumes that the relative proportions of each product sold and produced are constant (i.e., the sales mix is constant).
Read more about this topic: Break-even (economics)
Famous quotes containing the word limitations:
“That all may be so, but when I begin to exercise that power I am not conscious of the power, but only of the limitations imposed on me.”
—William Howard Taft (1857–1930)
“To note an artist’s limitations is but to define his talent. A reporter can write equally well about everything that is presented to his view, but a creative writer can do his best only with what lies within the range and character of his deepest sympathies.”
—Willa Cather (1876–1947)
“Much of what contrives to create critical moments in parenting stems from a fundamental misunderstanding as to what the child is capable of at any given age. If a parent misjudges a child’s limitations as well as his own abilities, the potential exists for unreasonable expectations, frustration, disappointment and an unrealistic belief that what the child really needs is to be punished.”
—Lawrence Balter (20th century)