Variable cost ratio

The variable cost ratio reveals the total amount of variable expenses incurred by a business, stated as a proportion of its net sales. For example, if the price of a product is $100 and its variable expenses are $60, then the product's variable cost ratio is 60%. This ratio is useful at the product level, in order to understand the amount of margin remaining after variable expenses have been deducted from a sale. This is known as the contribution margin, and is calculated as 1 minus the variable cost ratio.

The variable cost ratio is also useful at the organizational level, to determine the amount of fixed costs that it incurs. A high variable cost ratio implies that a business can earn a profit at a relatively low sales level, since there are few fixed costs to pay for. A low variable cost ratio implies that the breakeven sales level is high, in order to pay for the large base of fixed costs.

Related Courses

Cost Accounting Guidebook 
Financial Analysis