Contribution margin ratio is a percentage of contribution to sales. It is calculated by dividing the total contribution margin by total sales. Contribution margin is calculated by deducting all the variable costs from total sales.
The formula for contribution margin ratio is:
Contribution margin ratio = Total Contribution / Total Sales = (Sales – variable costs) / Sales
Assume the following contribution income statement:
|
Sales |
7,500,000 |
|
|
Less: Variable Costs |
||
|
Material |
(350,000) |
|
|
Labor |
(700,000) |
|
|
Variable FOH |
(1,200,000) |
|
|
Variable Marketing costs |
(370,000) |
|
|
Variable Selling costs |
(1,350,000) |
(3,970,000) |
|
Contribution Margin |
3,530,000 |
|
|
Less: Fixed Costs |
||
|
Fixed FOH |
(600,000) |
|
|
Fixed Marketing costs |
(420,000) |
|
|
Fixed Selling costs |
(500,000) |
(1,520,000) |
|
Profit |
2,010,000 |
In the example above the contribution margin ratio will be 47.06% (3,530,000 / 7,500,000).
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