Contribution Margin Ratio
Definition
Contribution margin as a percentage of sales, showing how much of each sales unit is left after variable costs to cover fixed costs and profit. It drives break-even and pricing analysis.
Formula
Contribution margin ratio = (Sales − Variable costs) ÷ Sales × 100
Related Terms in Financial Analysis
Margin of Safety
The gap between actual or budgeted sales and the break-even point, showing how far sales can fall before the business makes a loss. A larger margin of safety means lower risk.
Operating Leverage
The degree to which a business's costs are fixed rather than variable. High operating leverage means profits rise fast as sales grow past break-even — but fall just as fast when sales decline.
Variance Analysis
Comparing actual results against budget or standard figures and investigating the differences. It helps managers understand why performance differed from plan and where to act.
Horizontal Analysis
Comparing financial statement figures across multiple periods to spot trends and growth rates. It reads the accounts left to right, period over period.
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