ACCA Performance Management (F5) Certification Practice Exam

Which of the following is NOT a limitation of break-even analysis?

1. Total variable cost is proportional to volume

2. Selling price may vary

3. Total fixed cost remains constant

4. The only relevant factor is volume

The correct answer is: Selling price may vary

The correct understanding focuses on the nature of break-even analysis and its underlying assumptions. One fundamental aspect of break-even analysis is that it operates under the assumption that total fixed costs remain constant within the relevant range of production and sales volume. Consequently, variations in selling price are considered a limitation, as they can impact the break-even point and the overall analysis. Total variable cost being proportional to volume is another critical assumption, as break-even analysis typically assumes variability in costs in line with production output. Additionally, stating that the only relevant factor is volume simplifies the analysis too much and ignores other market dynamics and cost behaviors. The reason selling price may vary is not viewed as a limitation of break-even analysis; instead, it is an external factor that can affect profitability and sales outcomes. Hence, rather than being a limitation, the variability of selling price is an essential consideration in real-world applications of break-even analysis, highlighting the importance of understanding market conditions while utilizing this analytical tool.