What is the 'Variable Cost Ratio'
The variable cost ratio is an expression of a company's variable production costs as a percentage of sales, calculated as variable costs divided by total revenues. It compares costs that change with levels of production to the amount of revenues generated by production. This contrasts with fixed costs that remain constant regardless of production levels.
BREAKING DOWN 'Variable Cost Ratio'
Consideration of the variable cost ratio, which can alternately be calculated as 1  contribution margin ratio, is one factor in determining profitability, since it indicates if a company is achieving, or maintaining, the desirable balance where revenues are rising faster than expenses.The variable cost ratio quantifies the relationship between revenues and the specific costs of production associated with the revenues. It is a useful evaluation metric for a company's management in determining necessary minimum profit margins, making profit projections and in identifying the optimal sales price for a product as part of price setting. The variable cost calculation can be done on a perunit basis, such as a $10 variable cost for one unit with a sales price of $100 giving a variable cost ratio of 0.1 or 10%, or by using totals over a given time period, such as total monthly variable costs of $1,000 with total monthly revenues of $10,000 also rendering a variable cost ratio of 0.1 or 10%.
Variable Costs, Fixed Expenses, Revenues, Contribution Margin and Profits
The variable cost ratio and its usefulness are easily understood once the basic concepts of variable costs, fixed expenses, and their relationship to revenues and general profitability is grasped.
The two expenses that must be known to calculate total production costs and determine profit margin are variable costs and fixed costs, also referred to as fixed expenses.
Variable costs are variable in the sense they fluctuate in relation to the level of production, or output. Examples of variable costs include the costs of raw material and packaging. These costs increase as production increases and decline when production declines. It should also be noted that increases or decreases in variable costs occur without any direct intervention or action on the part of management. Variable costs commonly increase at a fairly constant rate in proportion to increases in expenditures on raw materials and/or labor.
Fixed expenses are general overhead or operational costs that are "fixed" in the sense they remain relatively unchanged regardless of levels of production. Examples of fixed expenses include facility rental or mortgage costs and executive salaries. Fixed expenses only change significantly as a result of decisions and actions by management.
The contribution margin is the difference, expressed as a percentage, between total sales revenue and total variable costs. Contribution margin refers to the fact this figure delineates what amount of revenue is left over to "contribute" toward fixed costs and potential profit. The contribution margin ratio is always the inverse of the variable cost ratio.

Unit Cost
The cost incurred by a company to produce, store and sell one ... 
Negative Correlation
In statistics, a perfect negative correlation is a relationship ... 
Multiple Linear Regression  MLR
Multiple linear regression (MLR) is a statistical technique that ... 
Variable Interest Rate
A variable interest rate is a rate on a loan or security that ... 
Variable Overhead Spending Variance
The difference between actual variable overhead based on costs ... 
Shutdown Point
A point of operations where a firm is indifferent between continuing ...

Retirement
Variable Annuities: The DoItYourself Pension Plan
Variable annuities can cost more than mutual funds, but that might be worth the protection they can add to your retirement. 
Investing
Consider These Facts Before Choosing a Variable Annuity
Variable annuities do have some benefits, but there are some disadvantages and misconceptions to take into account as well. 
Retirement
How To Use The 4Box Strategy For Retirement Income
In today's volatile market, Generation X can't sit around waiting for things to improve. Gen X must implement innovative strategies for retirement planning. 
Investing
What's the Correlation Coefficient?
The correlation coefficient is a measure of how closely two variables move in relation to one another. If one variable goes up by a certain amount, the correlation coefficient indicates which ... 
Investing
Analyze Investments Quickly With Ratios
Make informed decisions about your investments with these easy equations. 
Retirement
Variable Annuities: A Good Retirement Investment?
Variable annuities provide lifetime payments and taxdeferred growth, but – given their hefty fees – are they right for you? 
Investing
A Look At Corporate Profit Margins
Take a deeper look at a company's profitability with the help of profit margin ratios. 
Investing
The Economics of Owning a Coffee Shop
Understand the economics of owning and running a coffee shop. Learn the basics of taking into account fixed, variable, and initial costs. 
Investing
Scenario Analysis Provides Glimpse Of Portfolio Potential
This statistical method estimates how far a stock might fall in a worstcase scenario. 
Retirement
Update Your Variable Annuity With Section 1035
Thanks to a special tax code clause, you can surrender a variable annuity without paying income tax.

Do production costs include all fixed and variable costs?
Learn more about fixed and variable costs and how they affect production costs. Understanding how to graph these costs can ... Read Answer >> 
How are fixed costs treated in cost accounting?
Learn how fixed costs and variable costs are used in cost accounting to help a company's management in budgeting and controlling ... Read Answer >> 
How do fixed costs and variable costs affect gross profit?
Learn about the differences between fixed and variable costs and how they affect the calculation of gross profit by impacting ... Read Answer >> 
What are the variables in variable costs?
Learn about variable costs. Explore how and why these costs may fluctuate, as well as ways in which they may differ from ... Read Answer >> 
What are the different types of costs in cost accounting?
Cost accounting aids in decisionmaking processes by allowing a company to evaluate its costs. Some types of costs in cost ... Read Answer >> 
Can you write variable costs off your taxes?
Learn if you can deduct variable or fixed costs from your business taxes and learn more about business deductions, cost of ... Read Answer >>