Variable Cost Ratio

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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".

BREAKING DOWN '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).

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