Business, Legal & Accounting Glossary
The variable cost ratio reveals the total amount of variable expenses incurred by a business, stated as a proportion of its net sales.
This is the ratio of variable cost to sales revenue, and is expressed as a percentage.
The variable cost ratio reveals a company’s total variable expenses expressed as a percentage of its net sales. For example, if a product’s price is $100 and its variable expenses are $60, the product’s variable cost ratio is 60%. This ratio is useful at the product level to understand the amount of margin left after variable expenses are deducted from a sale. This is known as the contribution margin, and it is calculated by subtracting 1 from the variable cost ratio.
The variable cost ratio can also be used at the organisational level to calculate the amount of fixed costs incurred. Because there are few fixed costs to pay for, a business with a high variable cost ratio can earn a profit at a low sales level. A low variable cost ratio implies that the breakeven sales level is high in order to cover the large fixed cost base.
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This glossary post was last updated: 13th April, 2022 | 0 Views.