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Chapter 7.docx

Administrative Studies
Course Code
ADMS 2510
Alison Beavis

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Chapter 7
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 methodthe two methods are equivalent.
Equation method: A method of computing break-even sales using the contribution-format income
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.
Break-Even (Shortcut Formula)
Sales Dollars:
Target Operating Profit (Shortcut Formula)
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