contribution margin ratio

The contribution margin ratio measures the effect on operating income of an increase or a decrease in sales volume.

Variable costs as a percentage of sales are equal to 100% minus the contribution margin ratio.

For the company Fusion, Inc. the contribution margin ratio is 40%, which is computed as follows:

Alternatively, as Contribution Margin Ratio over Operating Margin:

Multiplying the contribution margin ratio (40%) by the change in sales volume ($80,000) indicates that operating income will increase $32,000 if additional orders are obtained.

The contribution margin ratio, which is sometimes called the profit-volume ratio, indicates the percentage of each sales dollar available to cover fixed costs and to provide operating revenue.

The total contribution margin $432,000, can also be computed directly by multiplying the sales by the contribution margin ratio ($1'080,000 X 40%).

The contribution margin analysis is also applicable when the tax authority performs tax investigation, by identifying target interviewee who has unusual high contribution margin ratio then other companies in the same industry.

The Contribution Margin Ratio is the percentage of Contribution over Total Revenue, which can be calculated from the unit contribution over unit price or total contribution over Total Revenue: