Lecture 2

Question 1

Assumption 1 , problem

Answer 1

Sales Prices is constant
Problem-
Ignores discounts and PED

Question 2

Assumption 2 , problem

Answer 2

Variable costs are constant

Problem = Ignores economies of scale, synergies, economics, functions

Question 3

Assumption 3 , problem

Answer 3

Fixed costs remain unchanged

Problem = In reality most fixed costs become stepped fixed costs at some point

Question 4

Assumption 4 , problem

Answer 4

The business sells just one product or a number in fixed proportions

Problem = Over simplistic for most business

Question 5

Assumption 5, problem

Answer 5

Production units is the same as sales units

Problem = Unrealistic and doesn’t allow for stock

Question 6

Assumption 6 , problem

Answer 6

Costs can be easily divided into their fixed and variable components and identified with particular products

Problem = Not realistic in complex, multi-product businesses, Some costs are semi-variable and separation can be extremely difficult in practice