Part 2 — Decision Analysis

Selling price per unit minus variable cost per unit. It is the amount each unit sold contributes toward covering fixed costs and then profit.

Contribution margin divided by sales (or unit CM divided by selling price). It gives the fraction of each sales dollar available to cover fixed costs and profit.

The variable cost ratio is variable costs divided by sales. CM ratio = 1 − variable cost ratio; the two always sum to 1.

Fixed costs divided by contribution margin per unit. It is the sales volume at which total revenue equals total costs and operating income is zero.

Fixed costs divided by the contribution margin ratio. It is the dollar sales level at which operating income is zero.

Target units = (fixed costs + target operating profit) ÷ contribution margin per unit. Treat target profit as an additional 'fixed' amount to cover.