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Chapter: Civil : Engineering Economics and Cost analysis : Cost And Break Even Analyses

Break Even Analysis Assumptions

All costs are classified as either fixed or variable. If not impossible or impractical, dividing costs into the variable and fixed cost elements as an extremely difficult job.

BREAK-EVEN ANALYSIS ASSUMPTIONS:

 

         All costs are classified as either fixed or variable. If not impossible or impractical, dividing costs into the variable and fixed cost elements as an extremely difficult job. This is attributable to the inherent nature or characteristics of the cost per se.

 

         Fixed costs remain constant within the relevant range. Fixed costs remain unchanged at any level of activity within the relevant range, even at the zero level.

 

         The behavior of total revenues and total costs will be linear over the relevant range, i.e. will appear as a straight line on the BE chart. This is based on the idea that variable costs vary in direct proportion to volume; the fixed costs remain unchanged, hence drawn as a straight horizontal line on the graph within the relevant range; and that selling price is constant.

 

         In case of multiple product companies, the selling prices, costs and proportion of units (sales mix) sold will not change. This cannot always be correct. Sales mix ratio may be due to the change in the consuming habits of customers. Selling prices of the individual products may likewise change due to competition, popularity and salability of the products, etc.

 

         There is no significant change in the inventory levels during the period under review. Stated in another way, production volume is assumed to be almost (if not exactly) equal to the sales volume, which causes an immaterial (or none at all) difference between the beginning and ending inventories.

 

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Civil : Engineering Economics and Cost analysis : Cost And Break Even Analyses : Break Even Analysis Assumptions |


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