A break-even chart must be interpreted in the light of the limitations of its underlying assumptions … ‘ (From Cost Accounting: A Managerial Emphasis, by C.T. Horngren.)
(a) Discuss the extent to which the above statement is valid and both describe and briefly appraise the reasons for five of the most important underlying assumptions of break-even analysis.
(b) For any three of the underlying assumptions provided in answer to (a) above, give an example of circumstances in which that assumption is violated. Indicate the nature of the violation and the extent to which the break-even chart can be adapted to allow for this violation.