Demerits of Break-even analysis

Demerits are as such:In breakeven analysis- it is assumed that the selling price and the variable costs per unit

are known for each level of production. However in practice these are not known.

It does not permit a proper evaluation of cash flows.

Break even analysis assumes that the firm’s project exists in isolation.

Shutdown Point

• If the firm can not cover its variable costs (i.e AVC<P) in the short run, then the firm has to shut down.

MCATC

AVC

SHUT DOWN POINT

Real economies of scale

• These are :-

• Production

• Selling

• Managerial

• Storage and transport

Production economies

• It can be further classified in to labour, technical and inventory.

• Labour economies can be achieved by increasing the scale of output mainly due to division of labour by

• A. specialization of labour• B. time saving• Automation of production processes• volume economics

Technical Economies

• These economies are associated withfixed capital investments which include all machinery and other equipment. They result from the use of specialized equipment and labour and modern techniques of production . Mechanized methods of production have high average fixed costs at low levels of output. Once the appropriate scale is reached , these production techniques become profitable

Technical economies

• Technical economies may also arise due to reserve capacities to avoid disruption of production due to machine breakdown.

Inventory economies

• Inventory economies are maintained to meet the random fluctuations in both the output (finished products) and input (raw materials) of the firm