# Contribution margin ratio

## Definition:

Contribution margin ratio (CM ratio) is the ratio of contribution margin to net sales. It tells what percentage of sales revenue is available to cover fixed cost and generate profit.

## Formula:

Contribution margin ratio is calculated by dividing contribution margin figure by the net sales figure. The formula can be written as follows:

The ratio is also shown in percentage form as follows:

The numerator of the formula i.e., contribution margin can be calculated using simple contribution margin equation or by preparing a contribution margin income statement.

## Examples:

### Example 1

The total sales revenue of Black Stone Crushing Company was \$150,000 for the last year. The fixed and variable expenses data of the last year is given below:

Variable expenses:
Manufacturing: \$60,000

Fixed:
Manufacturing: \$10,000

Required: Calculate contribution margin ratio and also express it in percentage form.

### Solution:

Contribution margin = \$150,000 – (\$60,000 + \$30,000)
= \$150,000 – \$90,000
= \$60,000

Contribution margin ratio = \$60,000/\$150,000
= 0.4

Contribution margin percentage = (\$60,000/\$150,000) × 100
= 40%

The contribution margin is 40% which means 40% of the total net sales revenue generated during the year is available to cover all fixed expenses as well as generate profit for the business.

### Example 2:

The Monster company manufactures and sells two products. The data relating to sales and expenses for the last six months is given below:

The total fixed expenses for the last six months were \$60,000. Out of these fixed expenses, 50% were manufacturing and remaining 50% were related to marketing and administrative activities. There were no any beginning and ending inventories.

Required: Which product has the higher contribution margin ratio?

### Solution:

Product A’s contribution margin ratio is 0.42 or 42% where as product B’s contribution margin ratio is 0.5 or 50%. Product B is contributing more for covering fixed expenses and generating profit because its contribution margin ratio is higher than that of product A.

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