A-AS Level (CIE) Business Studies Paper-2: Specimen Questions with Answers 29 - 29 of 52

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Case Study-9

Alpha Limited manufactures air-conditioners of different sizes and types. For manufacturing air conditioners, most of the components are purchased from vendors; only some critical machinery work is undertaken by the company before the various components are used for assembly. The company has manual inventory control system. This system is not able to provide timely information to procure various components. In order to overcome this problem, the company wanted to install computerized inventory control system. For this purpose, the company hired an information system analyst. He studied the present inventory control system so that he could design job standardized forms in which relevant information about purchasing and usage of various components should be given for production department and accounting department. However, he was surprised to find that each department had a different view of what should go in the forms.

Question 29 (1 of 5 Based on Passage)

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Essay▾

State the uses and limitations of break-even analysis as a control technique.

Explanation

Break-even analysis is basically concerned with the (Cost-volume-profit relationship) sales magnifies a set of relationships of fixed costs, variable costs, price level of output, and sales mix to the profitability of the organization. Break-even analysis is made mathematically by applying the formulae to trace the break-even point, contribution, margin of safety, and profit/volume ratio, or graphically by break-even chart concerning the profitability of the organization.

Mathematically, relationships can be expressed as follows:

Or

Though break-even analysis, as a tool for decision making and control, has a few applications, it suffers from following limitations:

  • The assumptions that fixed costs remain fixed and variable costs vary in proportion to the volume of production do not hold good because of varying environmental conditions. Thus, various cost calculations have application in limited time horizon.
  • Break-even analysis does not consider the impact of learning curve on the cost behavior. Learning curve implies that an organization can reduce its costs because of the improvement in production operations processes. This phenomenon invalidates the total assumptions of the analysis.

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