What is the Variable Cost Ratio?

The variable cost ratio reveals the total amount of variable expenses incurred by a business, stated as a proportion of its net sales. For example, if the price of a product is $100 and its variable expenses are $60, then the product's variable cost ratio is 60%. This ratio is useful at the product level, in order to understand the amount of margin remaining after variable expenses have been deducted from a sale. This is known as the contribution margin, and is calculated as 1 minus the variable cost ratio.

The variable cost ratio is also useful at the organizational level, to determine the amount of fixed costs that it incurs. A high variable cost ratio implies that a business can earn a profit at a relatively low sales level, since there are few fixed costs to pay for. A low variable cost ratio implies that the breakeven sales level is high, in order to pay for the large base of fixed costs.

How to Calculate the Variable Cost Ratio

To calculate the variable cost ratio, divide the variable costs incurred by the related net sales. Variable costs are those costs that directly vary with the sales level. Net sales are gross sales minus all sales returns and allowances. The formula is:

Variable costs ÷ Net sales = Variable cost ratio