# limitation of break-even point

Satisfactory Essays
Recommendation
I recommend that proposal 2 should be chosen, because it has maximum profit. It also has the best margin of safety and contribution/sales ratio.
In proposal 2, an additional product W is added to the mix. So the fixed cost is increased. Although the fixed cost is increased, the profit increases sharply. What is noteworthy is that breakeven point is the largest in the 3 situations. It means that the company should take longer time to reach the breakeven point. So the company many have more risk.
The recommendation is made on the basis that the company has the capacity to produce all products. The company should be confident that there has enough demand for the new product W.

Qualification
When the company fully uses the production capacity, it can produce and sell all products. The company should be confident that this is possible at present and in the future.

Limitation of breakeven analysis
1. Breakeven analysis can be used for the company which produce only single product.
2. Breakeven analysis is valid within short period of time. Because any of the elements change. It would lead to the change of breakeven point.
3. When we use breakeven analysis, we assume that total fixed cost keep the same within the related range. But in the fact, the output exceed the relevant range, the total fixed cost will increase.
4. We assume that variable cost per unit keep the same and total variable cost can be represented as a straight line. But in the fact, if we change the supplier, the cost of material may decrease; the variable cost per unit may change.
5. We assume that selling price keep the same and total sales can be represented as a straight line. But in the fact, selling price may change. In order to increase sales, the company may reduce the selling price.
6. When we use breakeven analysis, we focus on the breakeven point. But when we make short-term decision, the company needs consider many other factors. For example, whether the

## You May Also Find These Documents Helpful

• Good Essays

BREAK-EVEN POINT A company's break-even point is the amount of sales or revenues that it must generate in order to equal its expenses. In other words, it is the point at which the company neither makes a profit nor suffers a loss. Calculating the break-even point (through break-even analysis) can provide a simple, yet powerful quantitative tool for managers. In its simplest form, break-even analysis provides insight into whether or not revenue from a product or service has the ability to…

• 2878 Words
• 12 Pages
Good Essays
• Good Essays

goals. “Break- even point” is one of the most important management tools. Easy to implement and it provides us with important information. This tool is used in most businesses and is extremely useful to increases sales and production to desired goal. In other words, it’s an important aspect of a company’s plan due to its determination for increased sales volume. The break-even point is usually calculated from a monthly or annual basis. If your business does not reach its break- even point, then you…

• 381 Words
• 1 Page
Good Essays
• Good Essays

Break-even point is that point at which there is neither profit nor loss. It is at point costs are equal to sales. It is otherwise called as balancing point, neutral point, equilibrium point, loss ending point, profit beginning point etc. After BEP is achieved, all the further sales will contribute to profit. At BEP, Sales – Variable cost = Fixed costs. OR Contribution = Fixed costs. Break-even analysis Break-even analysis is an analytical technique that is used to determine the probable…

• 649 Words
• 3 Pages
Good Essays
• Good Essays

article: Break-even (economics) In economics & business, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even." A profit or a loss has not been made, although opportunity costs have been "paid," and capital has received the risk-adjusted, expected return.[1] It is shown graphically as the point where the total revenue and total cost curves meet. In the linear case the break-even…

• 427 Words
• 2 Pages
Good Essays
• Good Essays

#3 Break-Even Analysis Rob Holland Assistant Extension Specialist Agricultural Development Center September 1998 One of the most common tools used in evaluating the economic feasibility of a new enterprise or product is the break-even analysis. The break-even point is the point at which revenue is exactly equal to costs. At this point, no profit is made and no losses are incurred. The break-even point can be expressed in terms of unit sales or dollar sales. That is, the break-even units…

• 758 Words
• 4 Pages
Good Essays
• Satisfactory Essays

to use? b) Break-Even Analysis – Systems of Equations Application Problem Suppose a company produces and sells pizzas as its product. Its revenue is the money generates by selling x number of pizzas. Its cost is the cost of producing x number of pizzas. Revenue Function: R(x) = selling price per pizza(x) Cost Function: C(x) = fixed cost + cost per unit produced(x) The point of intersection on a graph of each function is called the break-even point. We can also find the break-even point using the…

• 279 Words
• 2 Pages
Satisfactory Essays
• Good Essays

Calculating the break-even point To avoid making a loss every business must at least break-even by achieving a level of sales that covers its total costs. But what level of sales is necessary to break-even? To explore the concept of break-even, we need to define some basic terms: Fixed costs: Costs that do not vary with output or sales e.g. managers salaries, rent and rates on business premises. Variable costs: Costs that vary with the quantity produced or sold e.g. costs of materials…

• 828 Words
• 4 Pages
Good Essays
• Good Essays

Definition of Break Even point: Break even point is the level of sales at which profit is zero. According to this definition, at break even point sales are equal to fixed cost plus variable cost. This concept is further explained by the the following equation: [Break even sales = fixed cost + variable cost] The break even point can be calculated using either the equation method or contribution margin method. These two methods are equivalent. Equation Method: The equation method centers on…

• 542 Words
• 3 Pages
Good Essays
• Good Essays

and break up the monopoly of the 747, but it didn’t have a product to compete with Boeing’s 747. Compared to the 747, the A3XX provides more advantageous features which would attract passengers especially on the longer routes, such as more space per seat, four-engine plane, etc. The combination of increased capacity and reduced costs would provide superior economics. Airbus felt confident that capacity increases would eventually prevail. As we stated above, Airbus’s objectives are to break up the…

• 817 Words
• 4 Pages
Good Essays
• Better Essays

Break-Even Point Author(s): Satya Prakash Singh and Jayant V. Deshpande Source: Economic and Political Weekly, Vol. 17, No. 48 (Nov. 27, 1982), pp. M123+M125+M127M128 Published by: Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4371597 . Accessed: 01/04/2014 04:34 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that…

• 2452 Words
• 10 Pages
Better Essays