The contribution margin ratio is the difference between a company’s sales and variable expenses, expressed as a percentage.
A contribution margin ratio is important because it shows how much money is available to pay the fixed costs such as rent and utilities, that must be paid even when production or output is zero.
Formula to calculate contribution margin ratio.
Suppose a company’s total revenue in 2019 was $ 570,000 and the variable cost of the same year was worth $ 200,000. Determine the company’s contribution margin ratio for 2019.
Thus, the CM ratio of the company in 2019 was 64.9%.