11 Limitations of break-even analysis

Though break-even analysis has gradually become a service tool for modern financial management, there are certain objections raised against the utility of break-even analysis

The following are limitations of break-even analysis

  • Fixed costs do not always remain constant.
  • Variable costs do not always vary proportionately.
  • Sales revenue does not always change proportionately.
  • The horizontal axis cannot measure the units sold in as much as many unlike types of products are sold by the same enterprise.
  • Break-even analysis is of doubtful validity when the business is selling many products with different profit margins.
  • Break-even analysis is based on the assumption that income is influenced by changes in sales so that changes in inventory would not directly affect income. If marginal costing is used, this assumption would hold good but in other cases, changes in inventory will affect income because the absorption of fixed costs will depend on production rather than sales.
  • Condition of growth or expansion in an organization is not assumed under break-even analysis. In the actual life of any business organization, the operation undergoes a continuous process of growth and expansion.
  • Only a limited amount of information can be presented in a single break-even chart. If we have to study the changes of fixed costs, variable costs, and selling prices, a number of charts will have to be drawn up.
  • Even simple tabulation of the results of costs and sales can serve the purpose which is served by a break-even chart, hence there is no need for presenting the data through a break-even chart.
  • The chart becomes very complicated and difficult to understand for a layman if the number of lines or curves depicted on the graph is large.
  • The chart does not provide any basis for comparative efficiency between different units or organizations.

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