Basic break-even analysis typically assumes that: revenues increase in direct proportion to the volume of production, while costs increase at a decreasing rate as production volume increases. variable costs and revenues increase in direct proportion to the volume of production. both costs and revenues are made up of fixed and variable portions. costs increase in direct proportion to the volume of production, while revenues increase at a decreasing rate as production volume increases because of the need to give quantity discounts. All of these are assumptions in the basic break-even model.

variable costs and revenues increase in direct proportion to the volume of production.

Explanation:

Breakeven analysis can be defined as a financial accounting method or technique used for determining the number of units a business firm must sell at a specific price so as to cover all of its costs. It is a concept that allow business owners or financial experts to determine and know what they need to sell either on a monthly or annual (yearly) basis, in order to be able to cover the costs of doing the business.

Basically, it helps us to determine the amount of revenue required for the smooth operation of a business, amount of money needed to cover both fixed and variable costs. Using the breakeven analysis, production costs can be categorized as;

1. Variable costs: these are costs that usually change with respect to changes in the level of production or output. Examples are direct labor, maintenance of equipment or machines, raw materials costs etc.

2. Fixed costs: these are the costs which are not directly related to the level of production or not affected by the quantity of output in an organization. Examples are rent, depreciation, administrative cost, research and development costs, marketing costs etc.

Generally, basic break-even analysis is typically based on the principle that variable costs and revenues generated by a business firm or organization, increase in direct proportion to the volume of production i.e as the volume of production of a business firm increase, its variable cost and revenue generated also increases.

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