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
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