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Operating income less interest expense less income tax expense equals net income.

Contribution margin (CM) is the amount remaining from sales revenue after variable expenses

have been deducted.

Break-even point- The level of sales at which profit is zero. The break-even point can also be

defined as the point where total sales equals total expenses, or as the point where total contribution

margin equals total fixed expenses. Sales - variable expenses - fixed expenses = $0.00.

Contribution margin (CM) ratio: The contribution margin as a percentage of total sales.

The CM ratio is particularly valuable when trade-offs must be made between more dollar sales

of one product versus more dollar sales of another.

Incremental analysis: An analytical approach that focuses only on those items of revenue, cost, and

volume that will change as a result of a decision.

The break-even point can be computed using either the equation method or the contribution

margin method—the two methods are equivalent.

Equation method: A method of computing break-even sales using the contribution-format income

statement.

Variable expense ratio: The ratio of variable expenses to sales dollars.

Contribution margin method: A method of computing the break-even point where the fixed

expenses are divided by the contribution margin per unit.

SINGLE PRODUCT CVP ANALYSIS

Break-Even (Shortcut Formula)

Units:

Sales Dollars:

Target Operating Profit (Shortcut Formula)

Units:

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