Contribution Margin Ratio

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Contribution Margin Ratio

Contribution Margin Ratio =

(Sales Revenue - Cost Of Goods Sold)

Sales Revenue

INTERPRETATION

The contribution Margin Ratio is the difference between a company’s total sales revenue and variable costs. The percentage indicates how much of your sales revenue will be available to contribute toward fixed costs and profits. It helps owners and managers monitor the profitability of their products.

Note: The contribution margin is different from the gross profit.

Gross profit is sales revenue less the cost of goods sold (your fixed costs). In contrast, the Contribution margin is sales revenue less variable costs (rent, equipment leases, salaries, and other back-office expenses).

EXAMPLE

M&M Company sold 50,000 units of its latest product offering in the first half of the fiscal year. The selling price per unit is $100, incurring variable manufacturing costs of $30 and variable selling/administrative expenses of $10.

The result is a contribution margin ratio of .60 or 60%, meaning that 60% of the revenue earned by M&M Company is available to recover fixed costs and contribute to profit. And the remaining 40% is consumed by variable costs.

BENCHMARK: PG, ROT

Ideally, a good contribution margin allows you to cover your product costs and make a profit. The closer a contribution margin percent, or ratio, is to 100%, the better. The higher the percentage, the more money is available to cover the business’s fixed costs.

If the contribution margin is too low or negative, your product’s sales are not covering fixed costs. The product is not profitable, and if adjustments aren’t made, the company will incur losses.

Contribution Margin Ratio:

ABBREVIATION KEY:

ROT: Rule of thumb
HA: Historical Average (organization’s historical average)
PG: Peer Group average
EB: Economic Benchmark

DISCLAIMER: The interactive calculators on this site are self-help tools intended to help you visualize and explore your financial information. They are not intended to replace the advice of a qualified professional. Because each business is different, we can not guarantee accuracy.