Financial Analysis 8: Contribution Margin Ratio

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1. Definition
Contribution margin ratio is the ratio of contribution margin to net sales. It tells what percentage of sales revenue is available to cover fixed cost and generate profit.

Contribution margin ratio is calculated by dividing contribution margin figure by the net sales figure. The formula can be written as follows,

Contribution margin ratio = Contribution margin / Net sales

2. Example A
The total sales revenues of a company was 150000 for the last year. The fixed and variable expenses data of the last year is given below,

Contribution margin = Sales revenue - Variable expenses
= 150000 - 60000 - 30000
= 60000

Hence,

Contribution margin ratio = (Sales revenue - Variable expenses) / (Sales revenue)
= 0.4

The contribution margin is 0.4 of net sales which means that 0.4 of sales revenue can be used to pay all fixed expenses as well other business costs.