The CM ratio is particularly valuable in situations where trade-offs must be made between more dollar sales of one product versus more dollar sales of another. Generally speaking, when trying to increase sales, products that yield the greatest amount of contribution margin per dollar of sales should be emphasized. The fixed costs of $10 million are not included in the formula, however, it is important to make sure the CM dollars are greater than the fixed costs, otherwise, the company is not profitable.
To get the ratio, all you need to do is divide the contribution margin by the total revenue. For this section of the exercise, the key takeaway is that the CM requires matching the revenue from the sale of a specific product line, along with coinciding variable costs for that particular product. While there are various profitability metrics – ranging from the gross margin down to the net profit margin – the contribution margin (CM) metric stands out for the analysis of a specific product or service.
What is a contribution margin ratio?
If total fixed cost is $466,000, the selling price per unit is $8.00, and the variable cost per unit is $4.95, then the contribution margin per unit is $3.05. The break-even point in units is calculated as $466,000 divided by $3.05, which equals a breakeven point in units of 152,787 units. By multiplying the total actual or forecast sales volume in units for the baseball product, you can calculate sales revenue, variable costs, and contribution margin in dollars for the product in dollars. Selling price per unit times number of units sold for Product A equals total product revenue.
Important NoticeThe information contained in this article is general in nature and you should consider whether the information is appropriate to your needs. Legal and other matters referred to in this article are of a general nature only and are based on Deputy’s interpretation of laws existing at the time and should not cm ratio formula be relied on in place of professional advice. Reducing cost can be the most difficult option as it will most likely mean labor reduction or negotiating to spend less with your suppliers. It sounds like some technical jargon that your accountant may throw at you, but it’s actually quite simple to measure and understand.
Examples of Contribution Margin
The contribution margin shows how much additional revenue is generated by making each additional unit product after the company has reached the breakeven point. In other words, it measures how much money each additional sale «contributes» to the company’s total profits. To calculate the contribution margin, we must deduct the variable cost per unit from the price per unit. The $30.00 represents the earnings remaining after deducting variable costs (and is left over to cover fixed costs and more). The resulting ratio compares the contribution margin per unit to the selling price of each unit to understand the specific costs of a particular product. It will depend on your industry and product line as to what is deemed a satisfactory or good contribution margin.