## Contribution Margin Ratio: Definition, Calculation, and Example

The contribution margin ratio (CM ratio) is a financial ratio that measures the proportion of revenue that exceeds variable costs. It is calculated by dividing the contribution margin by the revenue and multiplying the result by 100 to express it as a percentage.

### Key Facts

- Calculate the Contribution Margin: The Contribution Margin is the difference between the revenue and the variable costs. It represents the amount of money available to cover fixed costs and contribute to profit. The formula to calculate the Contribution Margin is Revenue – Variable Costs.
- Calculate the Contribution Margin Ratio: The Contribution Margin Ratio is the Contribution Margin expressed as a percentage of the revenue. It helps to understand the specific costs of a particular product and guide pricing decisions. The formula to calculate the Contribution Margin Ratio is (Contribution Margin / Revenue) * 100.

Here is an example to illustrate the calculation:

Suppose a company has a product that generated $1 million in revenue, with variable costs of $600,000. To find the CM ratio:

- Calculate the Contribution Margin: Contribution Margin = Revenue – Variable Costs = $1,000,000 – $600,000 = $400,000.
- Calculate the Contribution Margin Ratio: Contribution Margin Ratio = (Contribution Margin / Revenue) * 100 = ($400,000 / $1,000,000) * 100 = 40%.

## Calculating the Contribution Margin Ratio

The contribution margin is the difference between the revenue and the variable costs. It represents the amount of money available to cover fixed costs and contribute to profit. The formula to calculate the Contribution Margin is:

**Contribution Margin = Revenue – Variable Costs**

The contribution margin ratio is calculated by dividing the contribution margin by the revenue and multiplying the result by 100. The formula to calculate the Contribution Margin Ratio is:

**Contribution Margin Ratio = (Contribution Margin / Revenue) * 100**

## Example of Contribution Margin Ratio Calculation

Suppose a company has a product that generated $1 million in revenue, with variable costs of $600,000. To find the CM ratio:

**Calculate the Contribution Margin:**

**Contribution Margin = Revenue – Variable Costs**

**= $1,000,000 – $600,000**

**= $400,000**

**Calculate the Contribution Margin Ratio:**

**Contribution Margin Ratio = (Contribution Margin / Revenue) * 100**

**= ($400,000 / $1,000,000) * 100**

**= 40%**

Therefore, the contribution margin ratio for this product is 40%. This means that for every $1 of revenue generated, $0.40 is available to cover fixed costs and contribute to profit.

### Conclusion

The contribution margin ratio is a useful tool for analyzing a company’s profitability and pricing strategy. It can also be used to compare the profitability of different products or services.

**References:**

- https://www.investopedia.com/terms/c/contributionmargin.asp
- https://www.wallstreetprep.com/knowledge/contribution-margin-ratio/
- https://www.careerprinciples.com/resources/contribution-margin-ratio

## FAQs

### What is the contribution margin ratio?

The contribution margin ratio is a financial ratio that measures the proportion of revenue that exceeds variable costs. It is expressed as a percentage.

### How do you calculate the contribution margin ratio?

The contribution margin ratio is calculated by dividing the contribution margin by the revenue and multiplying the result by 100.

### What does the contribution margin ratio tell you?

The contribution margin ratio tells you how much of each dollar of revenue is available to cover fixed costs and contribute to profit.

### What is a good contribution margin ratio?

A good contribution margin ratio varies by industry, but generally speaking, a ratio of 30% or higher is considered to be good.

### How can I improve my contribution margin ratio?

There are a few ways to improve your contribution margin ratio, such as increasing revenue, reducing variable costs, or both.

### What is the difference between the contribution margin and the contribution margin ratio?

The contribution margin is the difference between revenue and variable costs, while the contribution margin ratio is the contribution margin expressed as a percentage of revenue.

### How is the contribution margin ratio used in pricing decisions?

The contribution margin ratio can be used to help set prices that cover variable costs and contribute to profit.

### How is the contribution margin ratio used in profitability analysis?

The contribution margin ratio can be used to analyze a company’s profitability and compare the profitability of different products or services.