Variable cost ratio
Variable cost ratio: variable costs expressed as a percentage of sales revenue, equal to one minus the contribution margin ratio — used to move quickly between sales and cost figures.
FrameworkCost-volume-profit (CVP) model
See it move
A boutique sells scarves at €40 each, and the variable cost of buying and finishing each one is €14, giving a variable cost ratio of €14 divided by €40, or 35%. The same ratio holds at revenue level: selling 300 scarves generates €12,000 of sales and €4,200 of variable costs, and €4,200 divided by €12,000 is again 35%, leaving a 65% contribution margin ratio.
The formula
Variables
- Variable cost ratio (ratio)
- Total variable costs (€)
- Sales revenue (€)
- Contribution margin ratio (ratio)
Gives variable costs as a share of sales revenue, and its complement is the contribution margin ratio used throughout CVP analysis.
Check yourself
A café sells specialty coffees for €5.00 each; the variable cost of ingredients and packaging is €2.00 per coffee. Last week the café sold 640 coffees for total sales of €3,200. What is the café's variable cost ratio?