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Definition: Contribution Margin Ratio
The difference between the selling price per unit and variable price per unit divided by the selling price per unit gives the contribution margin ratio. It can be expressed in terms of percentage also.
The selling price of a product consists of the fixed cost, variable cost and the profit. Fixed costs include the costs of building the plant, buying machineries for production and other tangible assets which are essential for the production of the goods. This cost does not vary with the number of goods produced in a span of time and the cost is fixed irrespective of the amount of goods produced. Hence it is called fixed cost. The target of every company is to recover this fixed cost as soon as possible so that breakeven can occur quickly. Hence, larger the contribution margin, lesser is the time required to earn profit.
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