What is the formula for the contribution margin ratio?

The contribution margin ratio is a critical metric used to assess how much of a company's sales revenue is available to cover fixed costs and contribute to profit after variable costs have been accounted for. The formula for the contribution margin ratio is indeed calculated by dividing the contribution margin by sales revenue.

To elaborate, the contribution margin itself is determined by subtracting total variable costs from total sales revenue. The contribution margin ratio then expresses this margin as a percentage of sales revenue, providing a useful indication of the profitability of sales once variable costs are paid.

This ratio is particularly valuable for decision-makers in understanding how changes in sales volume will affect overall profit. For instance, if a company's contribution margin ratio is high, it implies that a large portion of sales revenue is retained as profit after covering variable costs, which can guide pricing and sales strategies.

Other options do not relate to the formula for the contribution margin ratio. For example, net profit divided by total assets pertains to return on assets, while total revenue minus total expenses relates to net income, and sales revenue minus cost of goods sold provides gross profit, neither of which directly convey the concept of contribution margin in relation to sales revenue.