Page 203 - BA2 Integrated Workbook - Student 2017

Short-term decision making

2.3 C/S ratio

The contribution to sales ratio (C/S ratio) is a useful calculation in CVP analysis. It is
usually expressed as a percentage. It can be calculated as follows:

Contribution
C/S ratio ——————
Sales

The C/S ratio can be calculated using contribution and sales at either a unit
level, or at a total level.

(120 – 80)
C/S ratio ————— = 33.3%
120

A higher contribution to sales ratio means that contribution grows more
quickly as sales levels increase. Once the breakeven has been passed, profits
will accumulate more quickly than for a product with a lower contribution to
sales ratio.

The C/S ratio can be used in the calculation of the breakeven point. When we use
the C/S ratio on the bottom of the breakeven formula, we get the answer in $ of sales
revenue, rather than in units:

Fixed costs
Breakeven point in $ of sales = —————
C/S ratio

10,000
Breakeven point in $ of sales = ———— = $30,000
(40 ÷ 120)

Note: this could also have been calculated as breakeven point × selling price.

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