The break-even analysis is based on a series of assumptions, which are as follows:
- All costs (production, selling and production) can be segregated into fixed and variable components.
- Behavior of costs is linear i.e. there will be a straight line if cost data are shown on a graph.
- The total amount of fixed costs will remain constant at each output level and variable costs will fluctuate in direct proportion of output.
- Selling price of the product will remain constant at each sales level meaning selling price does not change on a change in supply of product.
- Price paid for inputs factors such as materials, wages, rent, advertisement etc. will remain the same.
- There will be no change in technological methods and efficiency of men and machines.
- Revenues and costs are compared on a common activity base e.g. sales value of the products or number of units produced.
- Output or sales volume only is assumed to be the relevant factor affecting costs.
To read more about break-even analysis : http://www.sba.gov/content/breakeven-analysis