There are two definitions we are perhaps looking for here. The first is “what is the break-even point?”. This is the point where revenue derived from an entity’s sales equals the total costs (both fixed and variable) incurred to generate those sales. Fixed costs refer to costs that remain the same within a range of sales. While, quite obviously, variable costs proportionally change to the change in sales within a set range.

The second question is then: “what is break-even analysis?”. Building on from what a break-even point (BEP) is, the analysis side is working through a range of scenarios as to how a firm can optimise its BEP, and in particular in seeing how fixed and variable costs can be changed (in total and per unit respectively) across different sales ranges. For example. by increasing capital investment and therefore fixed costs, can greater efficiencies be generated by growing sales volume.

You should start by understanding what break even actually means. It’s essentially the point where you are making neither a loss nor a profit. It’s the point onwards where your investment is worthwhile. It’s the point where your revenue equals your expenses (fixed costs, variable costs and the cost of the investment).

The break even analysis is used to find how many units you need to sell to make a profit (if the price is fixed or almost fixed) or how much should you sell for to be able to make a profit or at least not a loss.