Contribution margin ratio is the ratio of contribution margin to

Question

A. total variable costs

B. costs of goods sold

C. net sales revenue

D. total fixed costs

Answer 1

Contribution margin is equal to (net sales revenue - cost of goods sold).  It represents the amount of income from product sales available to "contribute" to fixed costs and profits.  The contribution margin ratio is the ratio of contribution margin to net sales revenue.

 

Contribution margin ratio is most often expressed as a percentage and used in various calculations.  For example, dividing fixed costs by contribution margin % gives us our break-even sales.  If we then divide break-even sales by the sales price per unit of product, we know the break-even number of units, i.e. the number of units we have to sell to cover fixed costs.  At this volume of sales, we stay in business, albeit just barely.  The next sale, however, results in profit.