Contribution Margin Ratio Examples
Lets look at some examples of using this ratio. First, we will need some numbers. Consider the following data for FiwiBooks Ltd.
Sales (1,000 units @ $14) - $14,000
- Less Variable expenses - $6,500
- Fixed Expenses - $2,000
First we will need to calculate the contribution margin.
Contribution margin = sales – variable costs = 14,000 – 6,500 = 7,500
We can now calculate the contribution margin ratio.
Contribution margin ratio = (contribution margin / Sales) × 100 = (7500/14000) x 100 = 53.57%
These figures tell us that for every dollar of sales just over 53% goes toward paying for fixed expenses, while the rest contributes to net profits. At present, the company makes $5,500 in profits (14,000-6,500-2,000). To calculate how much sales the company will need to make in order to exceed $10,000 in profits, we divide the amount of additional profit that is needed by the margin ratio.
To realize $10,000 in profits, FiwiBooks will need $4,500 in additional profits, (10,000 – 5500). Therefore, to make the additional $4,500 they will need to increase sales by $9,692 (4,500/0.5357). Since each book retails for $14, the company will need to sell an additional 692 ($9,692/14) books to breach the $10,000 profit target.