Contribution Margin Ratio

The contribution margin ratio expresses contribution as a share of revenue. It tells a business how much of every unit of sales is left after variable costs.

For example, a product sells for 50 with variable costs of 30, giving a contribution margin of 20. The contribution margin ratio is 20 divided by 50, or 40%. For every 100 of sales, 40 is available to cover fixed costs and profit.

The ratio is especially useful for businesses selling many different products, where calculating break-even in units is impractical. Dividing fixed costs by the contribution margin ratio gives the sales revenue needed to break even. With fixed costs of 15,000 and a ratio of 40%, break-even sales are 37,500.

It also helps estimate how profit changes with sales. If sales rise by 10,000, profit should rise by about 4,000, as long as fixed costs and the product mix stay the same.

A higher contribution margin ratio means profits respond more strongly to changes in sales. Businesses with high ratios, such as software companies, can see profits grow quickly once fixed costs are covered.