# Contribution Margin Ratio

### Reviewed by Subject Matter Experts

Updated on June 08, 2023

## Contribution Margin Ratio: Definition

The contribution margin ratio is the total contribution margin divided by total sales. It is also known as the profit-volume (P/V) ratio.

## Contribution Margin Ratio: Explanation

The contribution margin is the amount of revenue in excess of variable costs. One way to express it is on a per-unit basis, such as standard price (SP) per unit less variable cost per unit.

The contribution margin may also be expressed as a percentage of sales. When the contribution margin is expressed as a percentage of sales, it is called the contribution margin ratio or profit-volume ratio (P/V ratio).

## Formula to Calculate Contribution Margin Ratio

The contribution margin (or P/V) ratio is calculated as follows:

## Example

Company X manufactures and sells only one product. The per-unit costs are:

SP per unit = \$30

VC per unit = \$18

Contribution margin per unit = \$12

The company reports fixed costs of \$40,000.

Required: Calculate the contribution margin ratio (or P/V ratio).

P/V ratio = 30 - 18/30 = 40%

A contribution margin ratio of 40% means that 40% of the revenue earned by Company X is available for the recovery of fixed costs and to contribute to profit. The remaining 60% is consumed by variable costs.

The break-even point (BEP) is calculated using the contribution margin ratio. The formula is:

BEP = Fixed costs / P/V ratio

= 40,000 / 40%

= \$100,000

Conceptually, the contribution margin ratio reveals essential information about a manager's ability to control costs. This is especially true in relation to sales revenue.

A firm's ability to make profits is also revealed by the P/V ratio. With a high contribution margin ratio, a firm makes greater profits when sales increase and more losses when sales decrease compared to a firm with a low ratio.

## Contribution Margin Ratio FAQs

About the Author

### True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.