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Limitations of cost-volume-profit analysis in short term business planning

      

Limitations of cost-volume-profit analysis in short term business planning

  

Answers


Martin
i. Cost-volume-profit analysis assumes that selling price will remain constant throughout the
period under analysis. In real life business situation selling price is likely to change due to
market forces.

ii. Assumes that variable cost per unit remain constant. In business situation, variable costs are
likely to increase.

iii. Assumes that technology will remain constant. However technology is always changing due
to innovations.

iv. Assumes that supply equals demand and hence there is no closing stock. It is difficult to
match supply and demand hence closing stock is always there.

v. Assume that costs can only be divided into two, fixed cost and variable costs, hence no semivariable
costs. It is not easy to completely classify costs into fixed and variable.
vi. Only ideal for short-term planning

vii. Variable cost and sales are unlikely to be linear

viii. The chart is only a reasonable pointer to performance within normal activity ranges
marto answered the question on February 26, 2019 at 08:52


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