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The contribution to sales ratio..
✅ ..also known as the contribution margin ratio.
✅ ..a financial metric used in a business to evaluate the profitability of a product or service.
✅ ..measures the percentage of each sales dollar that is available to contribute towards covering fixed costs and generating profit after accounting for variable costs.
The contribution to sales ratio is calculated..
✅ ..by dividing the contribution margin by the sales revenue.
✅ The contribution margin is calculated as the difference between the sales revenue and variable costs.
🚩 Contribution margin per unit ($) = sales price per unit ($) — variable costs per unit ($)
🚩 Total contribution margin ($) = Total sales revenue ($) — Total variable costs ($)
✅ ..Mathematically, the contribution-to-sales ratio can be expressed as:
✅ ..let’s say a company generates $100,000 in sales revenue and incurs $60,000 in variable costs,
🚩 the contribution margin would be ($100,000 — $60,000) = $40,000 ; and
🚩 the contribution to sales ratio would be ($40,000 ➗ $100,000) = 0.4 or 40%
The contribution to sales ratio is a useful metric..
✅ ..for managers to analyse the profitability of products or services and to make decisions about pricing, production levels, and cost management.