Contribution Margin Ratio

Contribution margin ratio measures the percentage of each sales dollar that is left over after variable costs are subtracted, which gives you a read on a company's profitability and how efficient its cost structure actually is. Managers use it to evaluate product lines, pricing decisions, and operational performance, since it shows how much of each dollar of revenue actually goes toward covering fixed costs and generating profit.

Companies rely on this ratio to find break-even points, decide on product mix, and figure out what happens financially when sales volume changes.