Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd
Upload
28 views

Notes - Lecture 3.1.3

The document discusses the contribution margin ratio (CM ratio) and how it is calculated. It provides an example calculation using data from a bicycle company. The CM ratio can be used to determine how much contribution margin will increase with a rise in sales. Formulas are provided to calculate the CM ratio and to determine profit using the ratio and sales figures.

Uploaded by

Sakiful Islam
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
28 views

Notes - Lecture 3.1.3

The document discusses the contribution margin ratio (CM ratio) and how it is calculated. It provides an example calculation using data from a bicycle company. The CM ratio can be used to determine how much contribution margin will increase with a rise in sales. Formulas are provided to calculate the CM ratio and to determine profit using the ratio and sales figures.

Uploaded by

Sakiful Islam
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

CM Ratio

The contribution margin as a percentage of sales is referred to as the contribution margin


ratio (CM ratio). This ratio is computed as follows:
CM Ratio = CM/Sales

Racing Bicycle Company


Contribution Income Statement
For the Month of June
Total Per Unit CM Ratio
Sales (500 bicycles) $ 250,000 $ 500 100%
Less: Variable expenses 150,000 300 60%
Contribution margin 100,000 $ 200 40%
Less: Fixed expenses 80,000
Net operating income $ 20,000

$100,000 ÷ $250,000 = 40%

Each $1 increase in sales results in a total contribution margin increase of 40¢.

The CM ratio can also be computed as per unit basis:

CM Ratio = Unit Contribution Margin/Unit Selling Price

Illustrations: -

If Racing Bicycle increases sales from 400 to 500 bikes ($50,000), contribution margin will
increase by $20,000 ($50,000 × 40%). Here is the illustration: -

400 Units 500 Units


Sales $ 200,000 $ 250,000
Less: variable expenses 120,000 150,000
Contribution margin 80,000 100,000
Less: fixed expenses 80,000 80,000
Net operating income $ - $ 20,000

1
A $50,000 increase in sales revenue results in a $20,000 increase in CM ($50,000 × 40% =
$20,000).

CM Ratio Equation

The relationship between profit and the CM ratio can be expressed using the following
equation:

Profit = (CM ratio × Sales) – Fixed expenses

Exercise: 5-4, 5-18 (5), 5-20 (1a, 2), 5-22 (1), 5-23 (1),

Core Reading/Textbook:

Garrison, Ray, H., Noreen, Eric, W., & Brewer, Peter, C. (2015). Managerial Accounting.
[15th Edition]. The McGraw-Hill, New York, USA.

You might also like