Cost-volume-profit (CVP) analysis is a powerful tool for planning and decision making. Thus, CVP analysis emphasized the interrelationships of costs, quantity sold, and price. This analysis is defined as assessment of total revenues, total costs and operating income in response to changes in the volume of sales, the selling price, variable cost or fixed costs of production. The CVP analysis can be a valuable tool in identifying the extent and magnitude of the economic trouble a company is facing and helping pinpoint the necessary solution. Breakeven is a critical concept to CVP analysis.

The break-even point is the level of activity where total revenue equals total cost. Knowledge of the break-even point is useful management information as it is beyond this point that profit will be earned. The breakeven point tells managers that how much they must sell to avoid a loss. However, the application of break-even analysis is come with limitations.

Required:

With reference to journal articles, you are asked to discuss the limitations of break-even analysis in production and how to overcome these limitations.