Break even analysis can be defined as a collection or calculation of sales volume in terms of unit that are required to cover the costs of goods produced. A low number of sales volumes will be unable to recover costs and would prove to be unprofitable where as a high number of sales volumes will be profitable for the business. Break even analysis is a tool to identify relationship between fixed costs, variable costs and sale price per unit. In order to understand the concept of break even analysis we must understand the concepts of fixed costs and variable cost per unit.
Fixed cost is the cost that does not changes even if the production size and the sales level increase or decrease. Examples of fixed costs are rent, insurance, property tax and interest expenditures. On the other hand variable costs are the costs that change with the change in the number of production units. Examples of variable costs are the cost of direct labor and the cost of materials used during production. Total variable cost of a production is the variable cost per unit into number of units produced in that production. Both the fixed costs and the variable costs constitute the total cost of a production. In addition to above mentioned concepts selling price is the price of per unit sold. Selling price does not include the sales tax and the sale price of per unit sold into number of units sold constitutes the total sale. Now the break even point is the point where the sales volumes of the company break evens.
This means the total number of that must be sold over a specific period of time to attain a net profit of $0. The specific time period to achieve break even must be same as the time period for which the fixed costs of a company do not change. In most of the companies the time period for break even point is monthly however some companies calculate break even point on yearly or even hourly bases. In other words we can say a break even point is a point where the cost of goods and revenue becomes equal. At break even point there is no profit and no loss. However the break even point indicates even no profit is made yet but the costs are paid, risks are adjusted and there is an expectation of return.