Demerits of Break-even

analysis
Demerits are as such:
In breakeven analysis- it is assumed that the
selling price and the variable costs per unit
are known for each level of production.
However in practice these are not known.
It does not permit a proper evaluation of cash
flows.
Break even analysis assumes that the firms
project exists in isolation.

Shutdown Point
If the firm can not
cover its variable
costs (i.e AVC<P) in
the short run, then the
firm has to shut down.

M
C

ATC
AVC

SHUT
DOW
N
POIN
T

Real economies of scale

These are :Production

Selling
Managerial
Storage and transport

Production economies
It can be further classified in to labour,
technical and inventory.
Labour economies can be achieved by
increasing the scale of output mainly due
to division of labour by
A. specialization of labour
B. time saving
Automation of production processes
volume economics

Technical Economies
These economies are associated withfixed
capital investments which include all
machinery and other equipment. They
result from the use of specialized
equipment and labour and modern
techniques of production . Mechanized
methods of production have high average
fixed costs at low levels of output. Once
the appropriate scale is reached , these
production techniques become profitable

Technical economies
Technical economies may also arise due
to reserve capacities to avoid disruption of
production due to machine breakdown.

Inventory economies
Inventory economies are maintained to
meet the random fluctuations in both the
output (finished products) and input (raw
materials) of the firm