Contribution margin ratio

Definition

The contribution margin ratio is the percentage of each sales dollar that remains after deducting variable costs. It helps in understanding how sales affect profitability.

5 Must Know Facts For Your Next Test

1. Contribution margin ratio is calculated as (Sales - Variable Costs) / Sales.
2. A high contribution margin ratio indicates a higher portion of sales contributes to covering fixed costs and generating profit.
3. It is used in break-even analysis to determine the sales needed to cover all costs.
4. The ratio can be used to compare the profitability of different products or services.
5. Fixed costs do not affect the contribution margin ratio; only variable costs are considered.

Review Questions

• How do you calculate the contribution margin ratio?
• Why is a high contribution margin ratio advantageous for a company?
• How does the contribution margin ratio assist in break-even analysis?

Related terms

Variable Costs: Costs that change in direct proportion to changes in sales volume.

Fixed Costs: Costs that remain constant regardless of changes in sales volume.

Break-Even Point: The level of sales at which total revenues equal total costs, resulting in zero profit or loss.