5.5.4—Limitations of break-even

Break-even analysis simplifies reality by assuming linear revenue/cost relationships, stable prices and costs, one product or a constant mix, and known output.

Demand, capacity, step costs, quality, uncertainty and multiple products can invalidate the chart. It is best used with scenarios and sensitivity analysis.

State the assumption most likely to fail, then explain how it could change the decision.

A factory reaches overtime capacity, so variable cost rises in steps; the straight-line chart understates the true break-even point.

A precise break-even number can create false confidence when the assumptions are weak.