Question: List the chief advantages and shortcomings of using breakeven analysis in pricing decisions. Breakeven analysis is a means of determining the number of goods or services that must be sold at a given price to generate revenue sufficient for covering total costs. It is easily understood by managers and may help them decide whether required sales levels for a certain price are realistic goals. Its shortcomings are as follows. First, the model assumes cost can be divided into fixed and variable categories and ignores the problems of arbitrarily making some allocations.
Second, it assumes that per-unit variable costs do not change at different levels of operation, ignoring the possibility of quantity discounts, more efficient use of the workforce, and other possible economies. Third, the basic breakeven model does not consider demand. It is a cost-based model and fails to directly address the crucial question of whether consumers will actually purchase the product at the specified price and in the quantities required for breaking even or generating profits. The modified breakeven concept combines traditional breakeven analysis with an evaluation of consumer demand. It directly addresses the key question of whether consumers will actually purchase the product at different prices and in what quantities.