Contribution Margin = Sales -Variable Cost
⇒CM=820,000−820,000×0.55
⇒CM=369,000
Contribution Margin Ratio = Contribution Margin / Sales
⇒Contribution Margin Ratio = 369,000÷820,000=0.45
In percentage, 0.45×100
=45%
What is the Contribution Margin Ratio?
- The ratio of contribution margin to net sales is known as the contribution margin ratio (CM ratio). It details the portion of sales revenue that can be used to pay fixed costs and make a profit.
- Contribution margin, or the marginal profit per unit sold, is a helpful metric in carrying out various computations and can be used as a gauge of operating leverage in cost-volume-profit analysis, a type of management accounting.
- The labor-intensive service sector typically has low contribution margins, whereas the capital-intensive industrial sector typically has high contribution margins.
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