Contribution Margin Ratio

The contribution margin ratio finds the business' breakeven point in sales dollars

(Sales Price per unit-Variable Cost per unit) is the contribution margin per unit. The formula can be rewritten as contribution margin per unit/selling price per unit.

To find the contribution margin ratio, we divide the contribution margin by the total revenue or the sales price per unit.

Also known as dollar contribution per unit, this ratio shows a company how a product contributes to the overall profit of the company. This in turn shows the profit potential of a particular product and shows the portion of sales that helps to cover the company's fixed costs. Any remaining revenue left after covering fixed costs is the profit generated.

Both gross margin and contribution margin find profitability, but the contribution margin ratio is a better way to find an individual product's profitability since it accounts for the variable cost, whereas gross margin better finds overall profitability of the entire business.

Contribution margin and contribution margin ratio are both extremely pivotal in determining the breakeven point of the company.

Examples

Weber Inc. sells its one product for $120 per unit. The variable cost per unit is $30. The fixed cost per year is $900,000. What is the contribution margin ratio?

$120-$30 = $90 (contribution margin)

$90/$120 = 0.75 (contribution margin ratio)

Exotic Case has the following information available in its internal reporting system:

• Sales volume, in units: 47,350

• Selling price per unit: $300

• Variable costs associated with each unit (sales commission): $30

• Fixed costs: $3,500,000

What is the gross margin ratio?

47350*300 = 14,205,000 (Total Revenue)

47350*30 = 1,420,500 (total variable cost)

(14,205,000-1,420,500)/14,205,000 = 0.9 (contribution margin ratio)

Sources

https://www.investopedia.com/terms/c/contributionmargin.asp

https://www.educba.com/contribution-margin-formula/