What Is the Formula for Finding the Variable Cost Ratio?
There are two formulas for calculating variable cost ratio. The first formula is: TVC ÷ TS = VCR. TVC is total variable costs, TS is total sales and VCR is variable cost ratio. Here’s an example with numbers: $2000 ÷ $10000 = 0.2. The variable cost ratio is 20 percent.
The second formula uses the difference between sales and variable cost, known as the contribution margin, and sometimes also called marginal income. First the CM has to be calculated: TS – TVC = CM and CM÷TS = CMR. Then the variable costs ratio is calculated: 1 – CMR = VCR. Here is an example with numbers: $10000 – $2000 = $8000. Then the CM ratio is calculated: 8000 ÷ 10000 = 0.8. Finally the variable cost ratio is presented: 1 – 0.8 = 0.2. The result is the same in both cases. The variable cost ratio is 20 percent.