The present study was undertaken with a sample of 300 dairy households in the eastern region of India with an aim to study the various cost structures and determine the optimum and breakeven output level. It was observed that the variable costs (Rs. 733.31) were about eight times higher than the fixed costs (Rs. 96.30) incurred on a dairy herd. All the average cost curves slope downward from left to right showing diseconomies of scale. It was observed that out of a decrease of Rs. 0.189 in average total cost due to one litre increase in milk output, Rs. 0.168 increment was that in average variable cost and Rs. 0.021 in average fixed costs. Thus, 88 per cent increase in average total cost was due to increase in average variable cost while remaining 12 per cent was due to increase in average fixed cost, making the average variable cost more elastic than average fixed cost. At the prevailing input and milk output prices in the market, the optimum milk output obtained after equating marginal cost to marginal revenue was 6.97 litres. Among all the variables affecting total cost of milk production on a dairy herd, only off farm income and milk output in a dairy household had a positive and significant impact. Also, with a daily milk output of 11.91 litres, the dairy business in the eastern region will break even given the prices per litre of milk in the region as Rs. 27.39.