Contribution Margin Ratio Example

Definition: Contribution Margin Ratio (CM Ratio) is the percentage of contribution over total revenues.

Formula:
Contribution Margin Ratio = (Price - Variable cost per unit) / price
OR = Total contribution margin / Total revenue
(Note: Contribution margin = sales price - variable costs)

Example 1:
If the price of a product is $300 and the unit variable cost is $250, then the unit contribution margin is $50, and the contribution margin ratio is 50 / 300 = 16.7%.

Example 2:
Product Y is sold at $50 per unit, and it has the following costs:
Purchase price $40
Packaging cost $3
Postage fee $2
Then, the total variable costs = 40 + 3 + 2 = 45
Contribution margin = 50 - 45 = $5
Contribution ratio = (5 / 50) * 100% = 10%

Example 3:
Company ABC sells a product for $2,000, and it incurs the following costs:
Direct labor costs $1,000
Transportation costs $100
Direct materials $500
Electricity $300
Advertising costs $150
Depreciation $260
Then, the total variable costs = 1,000 + 100 + 500 = $1,600
(Note: Electricity, Advertising costs and Depreciation are fixed costs)
Contribution margin = 2,000 - 1,600 = $400
Contribution Margin Ratio = (400 / 2,000) * 100% = 20%

* Next: Cash Flow Ratios Analysis & Formula