If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution margin ratio is 60%.

Contribution Margin Ratio

The contribution margin ratio quantifies the portion of sales revenue that is not consumed by variable costs and is available to cover fixed costs and generate profit.

Variable Costs

Costs that change in proportion to the level of activities or volume of production in a business.

Fixed Costs

Expenses that do not fluctuate with changes in production level or sales volume.