Lessons · Accounting · the contribution margin ratio
The contribution margin ratio
Contribution divided by sales, as a percentage. It says how much of every pound of revenue survives the variable costs, which makes it the quickest way to turn a sales figure into a contribution figure.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
It lets you answer questions in revenue when you do not know the unit mix. A business selling four hundred different items cannot compute contribution per unit for a forecast, but it can say that 40% of revenue survives, and that is enough to plan with.
How to think about it
Contribution over sales, either per unit or in total; both give the same ratio. To go the other way, multiply an expected revenue by the ratio to get expected contribution.
Worked example
Contribution 10.00 on a price of 25.00Per unit.
Ratio = 10.00 / 25.00 = 40%Forty pence of every pound survives the variable costs.
Expected sales of 120,000 → contribution = 120,000 × 0.40 = 48,000Revenue in, contribution out, no unit mix needed.
Break-even sales = fixed costs / ratioThe same ratio, used the other way round.
Your turn
Contribution 10.00 on a price of 25.00. Write the line that gives the ratio.
Ratio = 10.00 / = 40%
Solve one, graded on the server
The trap
Dividing contribution by variable cost instead of by sales. That produces a mark-up on cost, which is a different number with a different use, and the two are mixed up constantly.