Important limitations that should be observed while using break-even analysis are:
Limitations
1. The company must maintain good accounting system an-1 proper marginal accounting techniques and procedures.
2. It is static in character and is more useful in stable and slow moving situation rather than volatile, erratic and widely changing ones.
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3. Costs in a particular period may not be caused entirely by the output in that period.
4. It is difficult to handle selling cost in break-even analysis because the changes in selling costs are a cause and not a result of changes in the output and sales.
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5. Calculation should be made of several price levels because it is not possible to sell any quantity at one price.
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6. Break-even analysis is not effective for long range use and should be restricted to short run only. It should be limited to the budget period of the firm.
7. The cost revenue volume relationship is linear only over a narrow range of output.
8. It should be limited to few products and not too many products and departments.
9. Break-even analysis assumes that profits are a function of output ignoring that those are also caused by technological changes, improved management, changes in the scale of fixed factors of output etc.
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The break-even analysis is useful to management whose primary concern is to focus attention on basic relationships.
It is a guide to make decision and not a substitute for logical thinking; It is not of much use to firms who have constant shift in product mix and frequent changes in prices.