An accounting ratio that expresses the contribution margin as a percentage by relating it to total sales (revenues) in dollar terms:
Contribution margin ratio = contribution margin / total sales
This ratio indicates the percentage of the total sales monetary amount that an entity has at hand to cover its fixed costs and to contribute, if sufficient, to operating income. For example, if contribution margin is 300,000 currency unit (CU), and sales stand at 900,000 CU, then:
Contribution margin ratio = 300,000 / 900,000 = 33.33%
This means that the entity used 33.33% of its sales to cover variable costs, while the reminder is available to cover fixed costs, and then the reminder goes to net income.
The contribution margin ratio is also known as the profit-volume ratio.
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