The breakeven concept and the techniques of cost-volume-profit analysis are powerful business tools. Understanding them and applying them correctly can be an important part of achieving success in business. However, these tools, powerful as they are, have their limitations. Recognizing these limitations is essential to correctly understanding and using cost-volume-profit analysis.1 Here are the commonly recognized limitations:
•Linearity. The first limitation is that revenues and costs are assumed to be linear. That means the selling price per unit would never change and every customer would pay exactly the same price per unit. It also means that variable costs would be exactly the same for every unit. There ...
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