Which expression correctly defines the contribution margin ratio?

Which expression correctly defines the contribution margin ratio?

• A. CM ratio = (Selling price - Variable cost per unit) / Selling price.
• B. CM ratio = Selling price / Variable cost per unit.
• C. CM ratio = Selling price - Total costs / Selling price.
• D. CM ratio = Contribution margin per unit / Variable cost per unit.

Answer: (A)

The key idea is that the contribution margin ratio shows how much of each sales dollar remains after covering variable costs, to contribute to fixed costs and profit. It is defined as the contribution margin per unit divided by the selling price, which is (selling price minus variable cost per unit) over selling price. This tells you the portion of revenue that can be used for fixed costs and profit after paying variable costs. Why this form fits: the numerator is the contribution margin per unit (selling price minus variable cost per unit), and the denominator is the selling price, so you’re measuring how large that contribution is as a share of the selling price. You can also see it as 1 minus the variable cost per unit divided by the selling price, highlighting its role as the revenue portion available after variable costs. The other options don’t match this definition. One would yield a ratio of selling price to variable cost, which isn’t the contribution margin relative to revenue. Another mixes total costs (including fixed costs) with price, which corresponds to a different margin concept. The last compares per-unit contribution to per-unit variable cost, not the contribution relative to selling price. So the correct expression is the one that expresses contribution per unit as a fraction of the selling price.

The key idea is that the contribution margin ratio shows how much of each sales dollar remains after covering variable costs, to contribute to fixed costs and profit. It is defined as the contribution margin per unit divided by the selling price, which is (selling price minus variable cost per unit) over selling price. This tells you the portion of revenue that can be used for fixed costs and profit after paying variable costs.

Why this form fits: the numerator is the contribution margin per unit (selling price minus variable cost per unit), and the denominator is the selling price, so you’re measuring how large that contribution is as a share of the selling price. You can also see it as 1 minus the variable cost per unit divided by the selling price, highlighting its role as the revenue portion available after variable costs.

The other options don’t match this definition. One would yield a ratio of selling price to variable cost, which isn’t the contribution margin relative to revenue. Another mixes total costs (including fixed costs) with price, which corresponds to a different margin concept. The last compares per-unit contribution to per-unit variable cost, not the contribution relative to selling price.

So the correct expression is the one that expresses contribution per unit as a fraction of the selling price.