Definition: The break even point is the production level where total revenues equals total expenses. In other words, the break-even point is where a company produces the same amount of revenues as expenses either during a manufacturing process or an accounting period. Since revenues equal expenses, the net income for the period will be zero.
The company didn’t lose any money during the period, but it also didn’t gain any money either. It simply broke even.
Example
The break-even concept has universal applications across all businesses in any industry whether they are big or small. Since it is so widespread, the break even formula can be represented in many different ways.
Production managers tend to focus on the number of units it takes to recover their manufacturing costs. This is most common called the break-even point in units. It calculates the number of units that need to be produced and sold in a period in order to make enough money to cover the fixed and variable costs. The break-even point in units equation is calculated by dividing the fixed costs by the contribution margin per unit.
Higher-level management might tend to focus on the actual sales dollars instead of the number of units needed to recover costs. The break-even point in dollars formula is calculated by dividing fixed costs by the contribution margin ratio for the period.
What Does Break Even Point Mean?
Both of these measurements are key concepts for management in any industry. Retailers can use it to see how much product they must sell to meet their minimum costs. Manufacturers can calculate the amount of product that must be produced and sold during a period.
The break-even calculation also gives management an expectation for the future. For instance, if the company broke even in July, the rest of the year’s operations would be generating pure profits.
