Limitations to Breakeven analysis
Just as there are limitations with ratio analysis, there are also limitations to breakeven analysis. Breakeven analysis assumes that you sell all stock. It can be difficult to classify fixed versus variable costs. If you have multiple products, then it can be more difficult to determine and apply the fixed costs amongst the multiple products. Some products may be bought in bulk, allowing for a discount where others may incur a premium. Importing also can create difficulties due to fluctuating exchange rates.
The greater your product range the more complex your accounting system will be as you need to keep track of the individual costs for each product. You also need to continually note any assumptions used to calculate costs, just as you do with pricing.
If you manufacture your product, increased customer demand for your product may incur additional costs e.g., overtime that has not been factored into your costs.
You should really look at breakeven analysis as a planning tool rather than a decision-making tool.
Check out this video on how to Create our own Breakeven Analysis Chart using Microsoft Excel.
If you have Microsoft Excel on your computer, why not try creating a breakeven chart applying either your own information, or the information you have on Paul from the previous step.
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