A company breaks even for a given period when sales revenue and costs incurred during that period are equal. Thus the break-even point is that level of operations at which a company realizes no net income or loss.
A company may express a break-even point in dollars of sales revenue or number of units produced or sold. No matter how a company expresses its break-even point, it is still the point of zero income or loss.
In order to grasp the concept of breakeven, it’s important to understand that all costs are not created equal: Some are fixed, and some are variable. Fixed Costs are expenses that are not dependent on the amount of goods or services produced by the business. They are things such as salaries or rents paid per month. If you own a car, then your car payment and insurance premiums are fixed costs because you pay them every month whether you drive your car or not. Variable Costs are volume related and are paid per quantity or unit produced. For your car, your variable costs are things like gas, maintenance, or tires because you only incur these costs when you drive your car. The more miles you drive, the more your gas expenses go up—such costs vary with the level of activity.
Before we turn to the calculation of the break-even point, it’s also important to understand contribution margin.