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. Contribution Margin

    A cost accounting concept that allows a company to determine ...
  2. Variable Cost

    A corporate expense that varies with production output. Variable ...
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
  4. Operating Margin

    A ratio used to measure a company's pricing strategy and operating ...
  5. Expanded Accounting Equation

    The expanded accounting equation is derived from the accounting ...
  6. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified ...
Related Articles
  1. Analyzing Operating Margins
    Fundamental Analysis

    Analyzing Operating Margins

  2. Operating Leverage Captures Relationships
    Investing

    Operating Leverage Captures Relationships

  3. What are the risks of having both high ...
    Investing

    What are the risks of having both high ...

  4. Footnotes: Early Warning Signs For Investors
    Retirement

    Footnotes: Early Warning Signs For Investors

comments powered by Disqus
Hot Definitions
  1. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific ...
  2. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another ...
  3. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  4. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
Trading Center