Assumptions of break-even analysis

1.       The break-even chart is fundamentally a static analysis; normally changes can only be shown by drawing a new chart or a series of charts

2.       Relevant range is specified to define fixed and variable costs in relation to a specific period and designated range of production level

3.       All costs fall into either fixed or variable cost classification

4.       Unit variable costs remain the same and there is a direct relationship between costs and volume

5.       Volume is assumed to be the only important factor affecting cost behaviour

6.       Unit sales price and other market conditions are assumed to remain unchanged

7.       Total fixed costs remain constant over the relevant range considered

8.       Inventory changes are so insignificant that they have no impact on the analysis

9.       The technology level does not change.

                    Cost volume and profit analysis (CVP Analysis)

CVP Analysis examines the relationship between cost, activity level and the profit.

CVP Analysis assists in a wide range of profit planning and decision making situations including

a)       The effect of production method changes

b)      The effect of changes in product mix

c)       The viability of special sales promotion campaign

d)      The level at which service must be utilized to break-even

e)       The impact of price changes on profit as price changes

     CVP Analysis in conditions subject to change

Cost and revenue will change as well as sales volume due to a number of factors including:-

a)       Increased competition may require selling price discounts in order to stimulate demand

b)      Material prices, wage rates and overhead costs may all change because of the impact of inflation

c)       Material usage may change where scrap is expected to fall because of improved methods, better trained workers or better material quality

d)      Labour efficiency may change where improved training programs or a reduction in labour turn over is expected to occur

e)       Overhead expenses may fall due to more efficient placement of order with suppliers who offer best terms

f)        Product mix may change either as part of overall company strategy or due to increased competition