Limitations of Break even Analysis

Break even analysis refers to that analysis where a manufacturing company will get an idea about the number of unit which the firm should sell in order to recover the cost which has gone into making that product. Given below are some of the limitations of break even analysis –

  1. First and foremost limitation of this analysis is that it does not take into account demand side related problems and in this competitive world the emphasis should first on demand and then decision should be taken whether to product that product or not. So for example if breakeven point of a particular product is coming 150 units and company produces 200 units taking into account breakeven point but future demand for that product falls to 100 units than whole exercise of this analysis becomes futile.
  2. Fixed costs are assumed to be constant irrespective of production while doing this analysis which sometimes can lead to wrong estimate as fixed costs sometimes changes with changes in production.
  3. It requires a separate department or team f people to carry this operation leading to extra expenditure for an organization.
  4. If a company does not focus on sales but keep focusing on cost side issues than it can never grow, it’s like a salaried individual who keeps thinking about how to reduce personal expenditure instead of thinking how to increase sources of income.
  5. If complete data on cost structure of a product is not available than there is no benefit of doing this analysis as it would yield incorrect result.

 

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