What is the formula for contribution margin ratio?

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What is the formula for contribution margin ratio?

The key idea is expressing how much of each sales dollar remains after paying variable costs. The contribution margin per unit is price minus variable cost. To turn that into a ratio, you compare the margin to the selling price, giving the contribution margin ratio as (price − variable cost) divided by price. This shows what portion of each dollar of sales is available to cover fixed costs and contribute to profit. For example, if the price is 100 and the variable cost per unit is 60, the contribution margin per unit is 40, and the contribution margin ratio is 40/100 = 0.40, or 40%. Using (price − variable cost) divided by variable cost would yield 40/60, which does not represent the share of revenue left after variable costs. So the correct formula is (price − variable cost) / price.

The key idea is expressing how much of each sales dollar remains after paying variable costs. The contribution margin per unit is price minus variable cost. To turn that into a ratio, you compare the margin to the selling price, giving the contribution margin ratio as (price − variable cost) divided by price. This shows what portion of each dollar of sales is available to cover fixed costs and contribute to profit.

For example, if the price is 100 and the variable cost per unit is 60, the contribution margin per unit is 40, and the contribution margin ratio is 40/100 = 0.40, or 40%. Using (price − variable cost) divided by variable cost would yield 40/60, which does not represent the share of revenue left after variable costs.

So the correct formula is (price − variable cost) / price.

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