Limitations of Break Even Analysis
Posted by Ripon Abu Hasnat on Tuesday, December 1, 2015 | 0 comments
While breakeven analysis is a useful marketing analytical tool, it does have limitations. This are-1. Constant Price: The straight line TR curve assumes that every level of output can be sold at the same price. This is unrealistic for the reason that product prices do not remain constant as output hikes. In fact, they change frequently.
2. Constant Cost: It is also assumed that whatever the level of output, AVC remains the same. This suggests that there is no limit to output which the firm can produce. This is again highly unrealistic.
3. Limitless Profits: This analysis assumes that profits are a function of output. This suggests that profits increase without limit as the level of output rises. In fact this never happens for the reason profits are influenced by technological changes, improved management, higher productivity, changes in the scale of fixed factors etc.
4. Ignores Selling Costs: It is based only on production costs and neglects selling costs.
5. Data Limitations: As the BE analysis is based on accounting data, it suffers from such limitations of data as neglect of imputed costs, arbitrary depreciation estimates, inappropriate allocation of overhead costs etc.
6. Limited Products: This analysis is based on a limited range of products and area. The present day firm produces many products and has many departments or plants which cannot be lumped together and presented on a single BE chart. So the scope of this analysis is limited to a single product of a particular business firm.
7. Short run Analysis: The BEA can be used only during the short run. As such it is not an effective tool for the long run.
8. Ignores Elasticity of Demand: It ignores the concept of elasticity of demand and the possibility that different prices may lead to different levels of demand. It also ignores the principle of diminishing returns which every firm has to keep in view for breaking even.
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