Question

Which of the following is not a limitation of Break-even-analysis?

• A. Technical stability
• B. Cost segregation
• C. Applicability of multi-product firm
• D. Change in selling price

Hint:

The limitations of BEA stem from its core assumptions: constant selling price, constant variable cost per unit, constant total fixed costs, and a constant sales mix. Any factor that challenges these assumptions is a limitation.

Answer 1

The Correct Option is A

Step 1: Understanding the Question:
The question asks to identify which option is NOT a recognized limitation or a challenging assumption of Break-Even Analysis (BEA).
Step 2: Key Concept:
Break-Even Analysis is a financial tool used to determine the point at which total revenue equals total costs. It is based on several simplifying assumptions, and the violation or difficulty in meeting these assumptions constitutes its limitations.
Step 3: Detailed Explanation:
Let's analyze the options in the context of BEA limitations:
- (B) Cost segregation: BEA assumes that all costs can be perfectly segregated into fixed and variable components. In reality, this is often difficult as many costs are semi-variable. Thus, the difficulty of cost segregation is a limitation.
- (C) Applicability of multi-product firm: Standard BEA is designed for a single product. Applying it to a firm with multiple products is complex because of the varying selling prices, variable costs, and sales mix. This complexity is a significant limitation.
- (D) Change in selling price: BEA assumes that the selling price per unit remains constant regardless of the sales volume. In practice, prices may need to be changed to increase sales, which would invalidate a simple BEA chart. This assumption is a limitation.
- (A) Technical stability: BEA is a cost-volume-profit analysis tool. While it assumes that technology and production efficiency remain constant within the relevant range, "technical stability" itself is not listed as a direct limitation of the analytical model. It's an underlying condition for the cost assumptions to hold, but not a limitation of the technique in the same way as the others.
Step 4: Final Answer
Cost segregation, applicability to multi-product firms, and changes in selling price are all well-known limitations of break-even analysis. Technical stability is not considered a direct limitation of the method itself.