Variable Cost Ratio

AAA

DEFINITION of 'Variable Cost Ratio'

Variable costs expressed as a percentage of sales. The variable cost ratio compares costs, which fluctuate depending on production levels, to the revenues made on those products. This ratio relates the specific costs to the revenues they generate.

May also be defined as "1 - contribution margin ratio".

INVESTOPEDIA EXPLAINS 'Variable Cost Ratio'

The variable cost ratio is useful in setting pricing policy so as to arrive at the optimum price for a product. The calculation can be done on a per-unit produced basis, or by totals over a time period as long as the numerator and denominator are used.

For example, if variable costs per unit of a product are $55 and the product sells for $100, the variable cost ratio is 55%. The difference between the selling price and variable costs is known as contribution margin (CM); this amount is the contribution toward meeting fixed costs. The variable cost ratio can also be computed as (1 - CM ratio).

RELATED TERMS
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
  2. Variable Cost

    A corporate expense that varies with production output. Variable ...
  3. Operating Margin

    A ratio used to measure a company's pricing strategy and operating ...
  4. Contribution Margin

    A cost accounting concept that allows a company to determine ...
  5. Accident Year Experience

    Premiums earned and losses incurred during a specific period ...
  6. Book Value Reduction

    Reducing the value at which an asset is carried on the books ...
Related Articles
  1. Fundamental Analysis

    Analyzing Operating Margins

    Find out how to put this important component of equity analysis to work for you.
  2. Investing

    What are the risks of having both high operating leverage and high financial leverage?

    In finance, the term leverage arises often. Both investors and companies employ leverage to generate greater returns on their assets. However, using leverage does not guarantee success, and the ...
  3. Investing

    Operating Leverage Captures Relationships

    Find out how fixed and variable costs interact to shed new light on old companies.
  4. Fundamental Analysis

    How do I use the PEG (price to earnings growth) ratio to determine whether a stock is overvalued?

    Using the PEG, or price/earnings to growth, ratio provides a better picture of a stock's valuation versus simply relying on the P/E ratio.
  5. Taxes

    What is the best method of calculating depreciation for tax reporting purposes?

    Learn the best method for calculating depreciation for tax reporting purposes according to generally accepted accounting principles, or GAAP.
  6. Fundamental Analysis

    Are accounts receivable used when calculating a company's debt collateral?

    Learn how accounts receivables are recorded as assets on a balance sheet; they are used when calculating a company's total debt collateral.
  7. Fundamental Analysis

    Work In Progress (WIP)

    Work in progress, also know as WIP, is an asset on the company balance sheet. WIP is the accumulated costs of unfinished goods that are currently in the manufacturing process.
  8. Economics

    Oil Prices' Impact On Oil Transport Sector

    Short-term changes in oil prices and in the volume of oil produced have a marginal impact on the oil transportation industry in Canada.
  9. Fundamental Analysis

    What is the difference between cost of equity and cost of capital?

    Read about some of the differences between a company's cost of equity and its cost of capital, two measures of its required returns on raised capital.
  10. Entrepreneurship

    How do ridesharing companies like Uber make money?

    Discover the services a transportation company such as Uber provides and how the premiere ridesharing company operates and makes money.

You May Also Like

Hot Definitions
  1. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  2. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  3. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  4. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  5. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  6. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
Trading Center