January 31, 2024

The Contribution Margin Ratio Increases When Sales Increase

The contribution margin ratio is the percentage of profit earned by your company for a given time period (usually a month or quarter) after all variable expenses have been paid. When comparing this figure to total fixed expenses for that same time period, the higher the contribution margin the better.

Depending on your business, you may have more or less fixed costs than variable expenses. This means your contribution margin can differ widely between different products or services, but that doesn't mean you aren't making a profit with each one. Using the contribution margin to compare different products or services can help you make smarter decisions about how to allocate your resources.

In general, the contribution margin ratio increases when your sales increase because more of your variable costs are covered by each unit sold. This can include things like shipping and packaging fees, labor costs that fluctuate with production levels and raw materials cost that varies with the number of units produced. Increasing the number of units you sell can also help you reduce your overall production costs, which lowers your total variable cost per product and boosts your contribution margin.

However, it's important to keep in mind that if you have a low contribution margin ratio you could end up losing money with each unit produced. This can be caused by factors such as increased utilities fees, minimum wage requirements and other expenses that vary with the number of units sold. Keeping an eye on your contribution margin ratio can allow you to take action before you end up with a negative bottom line.

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