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. Capital Expenditure (CAPEX)

    Funds used by a company to acquire or upgrade physical assets ...
  6. Accident Year Experience

    Premiums earned and losses incurred during a specific period ...
RELATED FAQS
  1. 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 ... Read Full Answer >>
  2. How are contingent liabilities reflected on a balance sheet

    Contingent liabilities need to pass two thresholds before they can be reported in the financial statements. First, it must ... Read Full Answer >>
  3. What's the difference between the coverage ratio and the levered free cash flow to ...

    Coverage ratios focus on a company’s ability to manage its debt, while the levered free cash flow to enterprise value ratio ... Read Full Answer >>
  4. How do businesses determine if an asset may be impaired?

    In the United States, assets are considered impaired when net carrying value (book value) exceeds expected future cash flows. ... Read Full Answer >>
  5. What is the difference between a simple random sample and a stratified random sample?

    Simple random samples and stratified random samples differ in how the sample is drawn from the overall population of data. ... Read Full Answer >>
  6. What are the advantages and disadvantages of using systematic sampling?

    As a statistical sampling method, systematic sampling is simpler and more straightforward than random sampling. It can also ... Read Full Answer >>
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

    Operating Leverage Captures Relationships

    Find out how fixed and variable costs interact to shed new light on old companies.
  3. Investing

    Why International Diversification Matters Today

    Given the breadth and diversity of the U.S. economy and market, many U.S. investors feel comfortable keeping their money within U.S. borders.
  4. Economics

    Explaining the EBITDA Margin

    EBITDA margin can provide an investor with a cleaner view of a company's core profitability.
  5. Economics

    The U.S. Economy May Be Stronger Than You Think

    While the economic performance in the U.S. broadly disappointed in the first quarter, temporary factors presented one-off events that depressed output.
  6. Fundamental Analysis

    What is Quantitative Analysis?

    Quantitative analysis refers to the use of mathematical computations to analyze markets and investments.
  7. Economics

    Explaining Residual Value

    Residual value is a measurement of how much a fixed asset is worth at the end of its lease, or at the end of its useful life.
  8. Fundamental Analysis

    Understanding the Simple Random Sample

    A simple random sample is a subset of a statistical population in which each member of the subset has an equal probability of being chosen.
  9. Economics

    What is Systematic Sampling?

    Systematic sampling is similar to random sampling, but it uses a pattern for the selection of the sample.
  10. Entrepreneurship

    The Story Behind Google's Success

    An ongoing commitment to innovation and rapid iteration drives Google's ongoing success.

You May Also Like

Hot Definitions
  1. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  2. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  3. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  4. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
  5. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
Trading Center