Page 207 - BA2 Integrated Workbook - Student 2017

Short-term decision making

Limitations of CVP analysis

The limitations of the practical applicability of breakeven analysis and breakeven
charts stem mostly from the assumptions which underlie the analysis:

 Costs are assumed to behave in a linear fashion.

 Sales revenues are assumed to be constant for each unit sold.

 It is assumed that activity is the only factor affecting costs, and factors
such as inflation are ignored.

 The charts can only really be applied to a single product or service.

 The analysis seems to suggest that as long as the activity level is above
the breakeven point, then a profit will be achieved

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