Contribution Margin Ratio

The contribution margin ratio tells you what share of each sales dollar is left over after paying the variable cost of making or selling one unit. It works because the difference between selling price and variable cost is the contribution margin per unit, and dividing by price converts that amount into a proportion of revenue. This makes it useful for seeing how much each sale contributes toward fixed costs and profit.

Use this when you want to compare profitability across products with different prices, estimate how sales changes affect profit, or decide which items are better to promote. It is also helpful in break-even analysis and in pricing decisions.

• Using total fixed costs in the formula instead of variable cost per unit
• Forgetting to divide by selling price, which leaves the answer as a dollar amount instead of a ratio
• Mixing up contribution margin ratio with gross margin without checking whether all variable costs are included