What is the break-even point and how is it calculated?

The break-even point is the level of output at which total revenue exactly equals total costs, so the business makes neither a profit nor a loss. It is calculated by dividing total fixed costs by the contribution per unit, where contribution per unit is the selling price per unit minus the variable cost per unit. Selling above the break-even quantity produces a profit; selling below it produces a loss.

Why can a profitable business still run out of cash?

Profit and cash are not the same. A business can be profitable on paper but still run short of cash if customers pay late, if it ties up money in stock, if it buys expensive equipment, or if it must repay loans. Cash flow tracks the actual money moving in and out over time, while profit measures revenue minus costs over a period, so a profitable firm can still face a cash-flow crisis and fail without enough cash to pay bills.

What is the difference between gross profit and net profit?

Gross profit is revenue (sales) minus the cost of sales (the direct cost of the goods sold). Net profit, often called profit for the year, is gross profit minus all the other running expenses such as rent, wages and utilities. Gross profit shows how much is made on the products before overheads; net profit shows what is left after every expense, and is the truer measure of overall performance.

What do profitability and liquidity ratios measure?

Profitability ratios measure how good the business is at turning sales or capital into profit, for example the gross profit margin and the net profit margin. Liquidity ratios measure whether the business can pay its short-term debts, for example the current ratio, which compares current assets with current liabilities. Together they show whether a firm is both profitable and able to meet its bills, and they are most useful when compared over time or with similar firms.

SingaporeBusiness Studies

Financial Information and Decisions overview: O-Level Business Studies (SEAB 7085) on sources of finance, costs, revenue and break-even, cash flow, income statements, and the statement of financial position and ratios

Q: What does the Financial Information and Decisions module cover?

It covers how a business raises money and measures its financial performance. The topics are the main internal and external sources of finance and how a firm chooses between them, costs, revenue, contribution and break-even analysis, cash flow and cash-flow forecasting, the income statement and the calculation of gross and net profit, and the statement of financial position together with simple profitability and liquidity ratios.

A complete overview of the Financial Information and Decisions module in O-Level Business Studies (SEAB 7085): the sources of finance, costs, revenue and break-even analysis, cash flow and forecasting, income statements and profit, and the statement of financial position with simple ratios.

Generated by Claude Opus 4.88 min readSEAB-7085Updated 2026-06-13

Reviewed by: AI editorial process; not yet individually human-reviewed

Jump to a section

Why this module matters
Sources of finance
Costs, revenue and break-even
Cash flow and cash-flow forecasting
Income statements and profit
Statement of financial position and ratios
How this module is examined
Check your knowledge

Why this module matters

Finance is where every business decision is tested in numbers. The Financial Information and Decisions module of O-Level Business Studies (SEAB 7085) covers how a firm raises money, works out how many units it must sell to break even, manages the cash it needs to survive, measures its profit, and reads its financial position through ratios. This is the most quantitative module in the syllabus, and it rewards both correct calculation and clear interpretation of what the numbers mean.

This guide ties together the matching dot-point pages, each with its own worked examples and practice. See the whole syllabus at /sg-o-level/business-studies/syllabus and the subject hub at /sg-o-level/business-studies.

Sources of finance

The module begins with sources of finance: the main internal sources (retained profit, sale of assets, owners' funds) and external sources (bank loans, overdrafts, share issue, trade credit, grants), the difference between short-term and long-term finance, and the factors that decide which source a firm should use.

Costs, revenue and break-even

Costs, revenue and break-even covers revenue, fixed and variable costs, contribution, the break-even formula, the margin of safety, and the uses and limits of break-even analysis.

\text{Break-even quantity} = \frac{\text{Fixed costs}}{\text{Selling price} - \text{Variable cost per unit}}

Cash flow and cash-flow forecasting

A profitable firm can still fail if it runs out of cash. Cash flow and cash-flow forecasting covers the difference between cash and profit, how to build and read a cash-flow forecast, the causes of cash-flow problems, and ways to improve cash flow.

Income statements and profit

Income statements and profit covers the purpose and main parts of the income statement, how to calculate gross profit and profit for the year, the difference between them, and how profit is used or improved.

Statement of financial position and ratios

Finally, statement of financial position and ratios covers assets, liabilities and equity, and how to calculate and interpret simple profitability and liquidity ratios.

How this module is examined

The module appears in Paper 1 (short-answer and data-response) and the Paper 2 case study of SEAB 7085, assessed across Knowledge and Understanding, Application, Analysis and Evaluation. Calculations are common and must be interpreted.

Show your working. Set out the formula, substitute the figures and state the units; method marks reward clear steps.
Interpret the result. A break-even point, profit figure or ratio is only useful once you explain what it means for the firm's decision.
Recommend with reasons. Choose a source of finance or a way to improve cash flow that fits the specific business and justify it.

Break-even calculation

A company sells a product for $\text{S\textdollar}25$ . Each unit costs $\text{S\textdollar}15$ in variable costs, and fixed costs are $\text{S\textdollar}50{,}000$ per year. Find the contribution per unit, the break-even quantity, and the margin of safety if the company expects to sell 7{,}000 units.

Step 1: Calculate contribution per unit

Contribution per unit is the selling price minus the variable cost per unit:

\text{Contribution per unit} = \text{S\textdollar}25 - \text{S\textdollar}15 = \text{S\textdollar}10

Step 2: Calculate the break-even quantity

Break-even quantity is fixed costs divided by contribution per unit:

\text{Break-even} = \frac{\text{S\textdollar}50{,}000}{\text{S\textdollar}10} = 5{,}000 \text{ units}

Step 3: Calculate the margin of safety

The margin of safety is expected sales minus the break-even quantity:

\text{Margin of safety} = 7{,}000 - 5{,}000 = 2{,}000 \text{ units}

The firm must sell 5{,}000 units to break even. Expecting to sell 7{,}000, it has a 2{,}000-unit cushion before it would make a loss, which is a comfortable margin of safety.

Check your knowledge

A mix of recall, calculation and application questions covering the module. Attempt them before checking the solutions.

State one internal and one external source of finance. (2 marks)
A product sells for $\text{S\textdollar}40$ with variable costs of $\text{S\textdollar}24$ and fixed costs of $\text{S\textdollar}32{,}000$ . Calculate the break-even quantity. (3 marks)
Explain why a profitable business might still run out of cash. (3 marks)
A firm has revenue of $\text{S\textdollar}200{,}000$ and cost of sales of $\text{S\textdollar}120{,}000$ . Calculate the gross profit. (2 marks)
State what a liquidity ratio measures. (2 marks)

Solutions

Step 1: Sources of finance

Q1. Internal: retained profit (or sale of assets, or owners' funds). External: a bank loan (or overdraft, share issue, trade credit, or grant).

Step 2: Break-even quantity

Q2. Contribution per unit is $\text{S\textdollar}40 - \text{S\textdollar}24 = \text{S\textdollar}16$ . Break-even quantity is $\dfrac{\text{S\textdollar}32{,}000}{\text{S\textdollar}16} = 2{,}000$ units.

Step 3: Profit without cash

Q3. Profit is revenue minus costs over a period, but cash is the money actually available. A firm can be profitable yet short of cash if customers have not yet paid (credit sales), if cash is tied up in stock or new equipment, or if it must repay a loan, so it may be unable to pay its bills despite making a profit.

Step 4: Gross profit

Q4. Gross profit is revenue minus cost of sales: $\text{S\textdollar}200{,}000 - \text{S\textdollar}120{,}000 = \text{S\textdollar}80{,}000$ .

Step 5: Liquidity ratio

Q5. A liquidity ratio measures whether a business can pay its short-term debts, by comparing its current assets with its current liabilities.

Sources & how we know this

Singapore-Cambridge GCE Ordinary Level Business Studies (Syllabus 7085) — Singapore Examinations and Assessment Board (2026)