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Assumptions of Break Even Analysis

The break-even analysis is based on a series of assumptions, which are as follows:

  1. All costs (production, selling and production) can be segregated into fixed and variable components.
  2. Behavior of costs is linear i.e. there will be a straight line if cost data are shown on a graph.
  3. The total amount of fixed costs will remain constant at each output level and variable costs will fluctuate in direct proportion of output.
  4. 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.
  5. Price paid for inputs factors such as materials, wages, rent, advertisement etc. will remain the same.
  6. There will be no change in technological methods and efficiency of men and machines.
  7. Revenues and costs are compared on a common activity base e.g. sales value of the products or number of units produced.
  8. Output or sales volume only is assumed to be the relevant factor affecting costs.

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