### 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

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

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