Chapter 2, Problem 2.1Q

To determine

 

Concept introduction:

The contribution margin represents the amount of margin that is available from sales after incurring variable costs out. The formulas for contribution margin and contribution margin ratio are as follows:

To indicate: The meaning of the contribution margin ratio and its use in planning business operations. 

Explanation of Solution

The formula to calculate contribution are:

Contribution margin = Sales - Variable cost

And, $\mathrm{Contribution}marginratio=\frac{Contribution}{Sales}$

The contribution margin ratio indicates the percentage of contribution margin over sales. in other words, the contribution margin ratio indicates the % of sales that shall be available after subtracting variable costs. 

The contribution margin ratio is used by the companies in managerial decisions. A company can use the contribution margin ratio to evaluate the incremental benefits from increased prediction capacity.