Contribution Margin Ratio: Definition

The contribution margin ratio is the total contribution margin divided by total sales. It is also known as the profit-volume (P/V) ratio.

Contribution Margin Ratio: Explanation

The contribution margin is the amount of revenue in excess of variable costs. One way to express it is on a per-unit basis, such as standard price (SP) per unit less variable cost per unit.

The contribution margin may also be expressed as a percentage of sales. When the contribution margin is expressed as a percentage of sales, it is called the contribution margin ratio or profit-volume ratio (P/V ratio).

Formula to Calculate Contribution Margin Ratio

The contribution margin (or P/V) ratio is calculated as follows:

Contribution Margin Ratio Formula

Example

Company X manufactures and sells only one product. The per-unit costs are:

SP per unit = $30
VC per unit = $18
Contribution margin per unit = $12

The company reports fixed costs of $40,000.

Required: Calculate the contribution margin ratio (or P/V ratio).

P/V ratio = 30 – 18/30 = 40%

A contribution margin ratio of 40% means that 40% of the revenue earned by Company X is available for the recovery of fixed costs and to contribute to profit. The remaining 60% is consumed by variable costs.

The break-even point (BEP) is calculated using the contribution margin ratio. The formula is:

BEP = Fixed costs / P/V ratio

= 40,000 / 40%
= $100,000

Conceptually, the contribution margin ratio reveals essential information about a manager’s ability to control costs. This is especially true in relation to sales revenue.

A firm’s ability to make profits is also revealed by the P/V ratio. With a high contribution margin ratio, a firm makes greater profits when sales increase and more losses when sales decrease compared to a firm with a low ratio.

Learn More

We hope this article has helped improve your understanding of the contribution margin ratio. Learn more about it when you get in touch with a financial advisor in Clayton, MO. If you live outside the area, check out our financial advisor page.

Frequently Asked Questions

What is the formula for r-squared?

R = sqrt(e("r"^2)-(k)(se("r")))

What is r squared (r^2) in statistics?

The value that results from dividing the total variance of a data set by its degrees of freedom. It's also known as "coefficient of determination".

What is r squared called in statistics?

"R-squared" is the square of pearson's correlation coefficient, "r".

How do you find r squared on excel?

Excel also has a function for this: =rsq(x,y). Where x and y are the data sets you wish to correlate, and it will give the r-squared result.

What is Pearson's correlation coefficient?

Pearson's product moment correlation coefficient (pcc or prcc), often simply called "the" correlation coefficient in statistics, is a measure of the linear dependence between two variables. It gives a value between -1 and 1, where 1 is total positive correlation, 0 indicates no correlation, and -1 is total negative correlation.

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