To calculate the Contribution Margin (CM) ratio, you can use the formula:
CM ratio = (P - V) / P
where:
P = Selling Price = $225
V = Variable Costs = $90
CM ratio = ($225 - $90) / $225
CM ratio = $135 / $225
CM ratio = 0.6 or 60%
Therefore, the Contribution Margin ratio is 60%.
This means that for every dollar in sales, $0.60 is available to cover fixed costs and contribute towards profit.
