• CVP analysis is based on a number of simplistic assumptions about cost behaviour which undermine the model’s effectiveness.
  • Costs can be divided into fixed and variable costs but in reality many costs have a fixed and variable element(semi-variable) and may not be easy to divide.
  • There is a linear relationship between output and costs and revenues. The economists view tends to dispute this and presents a curvilinear model.
  • The business has only one product or there is a specific constant product mix.
  • The only factor influencing costs and revenues is output. Other factors such as production efficiency and production methods may impact on output.
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