What method calculates contribution margin
variable costing
The contribution margin is calculated using the contribution margin ratio method. The contribution margin is the difference between total revenue and total variable costs, which represents the amount of money available to cover fixed costs and generate profits.
The contribution margin ratio is the contribution margin divided by total revenue. It indicates the percentage of each sales dollar that is available to cover fixed costs and generate profits. The formula for calculating the contribution margin ratio is:
Contribution Margin Ratio = Contribution Margin / Total Revenue
By calculating the contribution margin ratio, managers can make informed decisions about pricing, product mix, and cost control. A higher contribution margin ratio indicates greater profitability, while a lower contribution margin ratio indicates lower profitability and may require cost-cutting measures or changes in pricing or product mix.
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