‘A break-even chart must be interpreted in the light of the limitations of its underlying assumptions…’

 Required:

(a) Discuss the extent to which the above statement is valid and both describe and briefly appraise the reasons for five of the most important assumptions of break-even analysis. 

(b) For any three of the underlying assumptions provided in answer to (a) above, give an example of circumstances in which that assumption is violated. Indicate the nature of the violation and the extent to which the break-even chart can be adapted to allow for this violation; 

Answer rating: 100% (QA)

a A breakeven chart must be interpreted in the light of the limitations of its underlying assumptions The above statement is true because there are some limitations with the breakeven point chart that are required to be considered while making any decision on the basis of breakeven chart Some of the limitations of breakeven points are given hereby which are required to be considered i The total costs may be classified into fixed and variable costs It ignores semivariable cost ii The cost and revenue functions remain linear iii The price of the product is assumed to be constant iv The volume of sales and volume of production are equal v The fixed costs remain constant over the volume under consideration vi It assumes constant rate of increase in variable cost b Examples of circumtances in which the particular assumption ... View the full answer