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Tools for Business Decision Management Makers_2

Tham khảo tài liệu 'tools for business decision management makers_2', khoa học xã hội, kinh tế chính trị phục vụ nhu cầu học tập, nghiên cứu và làm việc hiệu quả | WEAKNESSES OF BREAK-EVEN ANALYSIS 75 and volume are strictly straight-line ones. In real life this is unlikely to be the case. This is probably not a major problem since as we have just seen - break-even analysis is normally conducted in advance of the activity actually taking place. Our ability to predict future cost revenue and so on is somewhat limited so what are probably minor variations from strict linearity are unlikely to be significant compared with other forecasting errors and - most businesses operate within a narrow range of volume of activity over short ranges curved lines tend to be relatively straight. Stepped fixed cost. Most types of fixed cost are not fixed over all volumes of activity. They tend to be stepped in the way depicted in Figure 3.2. This means that in practice great care must be taken in making assumptions about fixed cost. The problem is heightened because most activities will probably involve various types of fixed cost for example rent supervisory salaries administration costs all of which are likely to have steps at different points. Multi-product businesses. Most businesses do not offer just one product or service. This is a problem for break-even analysis since it raises the question of the effect of additional sales of one product or service on sales of another of the business s products or services. There is also the problem of identifying the fixed cost of one particular activity. Fixed cost tends to relate to more than one activity - for example two activities may be carried out in the same rented premises. There are ways of dividing the fixed cost between activities but these tend to be arbitrary which calls into question the value of the break-even analysis and any conclusions reached. Activity 3.10 We saw above that in practice relationships between costs revenues and volumes of activity are not necessarily straight-line ones. Can you think of at least three reasons with examples why that may be the case We thought of the