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Why variable cost is taken to calculate C/S ratio

This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.

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April 25, 2021 at 4:01 pm #618826
Anonymous
Inactive
- Topics: 5
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Dear John,
In PM MCQ Test (Question 1), contribution to sales ratio is defined as 30% and the Variable cost is defined as $28 per unit.
In Answer part, while calculating the Selling Price per unit, why the c/s ratio is calculated from the % of variable cost instead, as per the understanding received through lectures, the c/s ratio is the linkage between contribution and selling price.
April 26, 2021 at 6:54 am #618856
John Moffat
Keymaster
- Topics: 56
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The CS ratio is indeed the contribution divided by the selling price.
However, given that the contribution is always the selling price less the variable costs, then if the contribution is 30% of the sales, the variable costs must be 100 – 30 = 70% of the sales.
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