Explain what are the limitations of Cost Volume Profit (CVP) Analysis For Short Term Decision Making

August 21st, 2006 Comments off
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The following are the limitations of Cost Volume Profit Analysis:

1. Segregation of total costs into its fixed and variable components is difficult to do.

2. Fixed costs are unlikely to stay constant as output increases beyond a certain range of activity.

3. The analysis is restricted to the relevant range specified and beyond that the results can be unreliable

4. Besides volume, other elements like inflation, efficiency, capacity and technology can affect costs

5. Impractical to assume sales mix remain constant since this depend on the changing demand levels.

6. The assumption of linear property of total cost and total revenue relies on the assumption that unit variable cost and selling price are constant. However, this is likely to be valid within relevant range only.

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