LO 3.1Define and explain contribution margin ratio.

Definition:

Contribution margin ratio is defined as, the difference between revenue and variable costs of the entity, expressed as percentage of sales.

Explanation:

Basically, the contribution margin ratio indicates that how much of sales amount is available to the entity to cover the fixed expenses incurred by the entity. It can be calculated using the following formula.

Formula = Contribution of the entity / Sales Revenue of the entity.

If the contribution margin ratio of any entity is for example 50%, it will indicate that 50% of the sales amount is available to the entity tocover the fixed expenses which are to be incurred by it.