Question

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Compute the contribution margin ratio based on the following data:

Sales revenue	$1,500,000
Variable manufacturing cost	$675,000
Fixed manufacturing cost	$200,000
Variable selling and administrative expense	$120,000
Fixed selling and administrative expense	$135,000
Net operating income	$370,000

Answer 1

Answer

• The formula for calculating Contribution margin ratio = (Contribution margin / Sales Revenue ) x 100
• This ratio tells how much a product earns as contribution margin per $ 100.
• CM Ratio is also used to calculate Break Even point in Sales dollars.
• Contribution margin ratio = (Contribution margin / Sales Revenue ) x 100

Contribution margin = Sales Revenue – All Variable costs

= 1500000 – 675000 (Variable manufacturing cost) – 120000(Variable selling & admin expenses)

= 1500000 – 675000 – 120000 = $ 705,000 = Contribution margin.

• Contribution margin ratio = (Contribution margin / Sales Revenue ) x 100

= ( $ 705,000 / $ 1,500,000) x 100

= 0.47 x 100

                = 47% = Contribution margin ratio.