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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.
✅ ..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%
✅ ..for managers to analyse the profitability of products or services and to make decisions about pricing, production levels, and cost management.