How is the contribution margin ratio calculated?

How is the contribution margin ratio calculated?

• A. The contribution margin ratio is computed as the contribution margin per unit divided by price.
• B. Price minus variable costs per unit, divided by price.
• C. Variable costs per unit divided by price.
• D. Profit divided by price.

Answer: (A)

The contribution margin ratio measures what portion of each sales dollar is left after paying variable costs to cover fixed costs and profit. It is calculated by taking the contribution margin per unit (price minus variable cost per unit) and dividing it by the price per unit. In formula form: (price − variable cost per unit) / price. This ratio can be expressed as a decimal or as a percentage. For example, if the price is 100 and the variable cost per unit is 60, the contribution margin per unit is 40, and the ratio is 40/100 = 0.40 or 40%. This shows how much of every dollar of sales is available to cover fixed costs and contribute to profit. The same idea can be applied using totals: total contribution margin divided by total sales.

The contribution margin ratio measures what portion of each sales dollar is left after paying variable costs to cover fixed costs and profit. It is calculated by taking the contribution margin per unit (price minus variable cost per unit) and dividing it by the price per unit. In formula form: (price − variable cost per unit) / price. This ratio can be expressed as a decimal or as a percentage. For example, if the price is 100 and the variable cost per unit is 60, the contribution margin per unit is 40, and the ratio is 40/100 = 0.40 or 40%. This shows how much of every dollar of sales is available to cover fixed costs and contribute to profit. The same idea can be applied using totals: total contribution margin divided by total sales.