ACCA Performance Management (F5) Certification Practice Exam

What is the contribution/sales ratio (C/S ratio) formula?

1. Sales / Contribution

2. Variable costs / Sales

3. Contribution / Sales

4. Fixed costs / Contribution

The correct answer is: Contribution / Sales

The contribution/sales ratio, often referred to as the C/S ratio, is a key metric in management accounting that indicates the proportion of sales revenue that exceeds total variable costs. It is calculated using the formula: Contribution/Sales. This ratio helps businesses understand how much of each sales dollar contributes to covering fixed costs and generating profits after accounting for variable costs. A higher C/S ratio indicates that a larger portion of sales revenue is available to contribute to fixed costs and profits. To break down the components further, contribution is calculated as sales revenue minus variable costs. Therefore, when you divide contribution by sales, you are effectively measuring the efficiency of sales at generating contribution. This is essential for decision-making processes, such as pricing strategies and assessing the profitability of products or services. Understanding the C/S ratio provides valuable insights into how effectively a company can transform sales into profit, making it an important tool in performance management and financial analysis.