The variable cost ratio represents the proportion of a company’s revenue consumed by its variable costs. It is determined by dividing total variable costs by total net sales. For example, if a company’s variable costs total $60,000 and its net sales are $100,000, the ratio would be 0.60, or 60%. This indicates that 60 cents of every dollar in sales are used to cover variable expenses.
Understanding this metric is crucial for assessing a business’s profitability and operational efficiency. A lower ratio generally indicates a greater proportion of revenue available to cover fixed costs and generate profit. This information aids in pricing decisions, cost control efforts, and overall strategic financial planning. Businesses have long used cost analysis to understand profitability, and the variable cost ratio provides a readily understandable metric for evaluating business performance.