CMratio

CMratio, short for contribution margin ratio, is a managerial accounting metric that measures the portion of each sales dollar that remains after variable costs are subtracted. It is calculated as CMratio = (Sales − Variable Costs) / Sales, which is the same as Contribution Margin divided by Sales, or equivalently 1 minus the Variable Cost Ratio.

The metric is used to assess profitability, plan pricing, and perform break-even analysis. The break-even point in dollars is fixed costs divided by the CMratio, while the break-even point in units is fixed costs divided by the contribution margin per unit. Profit at a given level of sales can be expressed as Profit = CMratio × Sales − Fixed Costs. Because the CMratio reflects how much of each sales dollar contributes to fixed costs and profit after variable costs are covered, it is especially helpful for evaluating the impact of price changes, cost changes, or changes in sales volume.

A simple example: if a product sells for 100 with variable costs of 60, the contribution margin is 40 and the CMratio is 0.4. If fixed costs are 200, the break-even sales in dollars would be 200 / 0.4 = 500.

Limitations include the assumption that variable costs and the CMratio stay constant within the relevant range, which may not hold with large or rapid changes. In multi-product settings, a single CMratio may be misleading; a weighted or product-specific approach is often necessary. CMratio is a foundational tool for budgeting, performance analysis, and what-if forecasting in managerial accounting.