Question

The variable expense ratio equals: a) Sales ÷ contribution margin. b) Sales ÷ variable expenses. c) Variable expenses ÷ sales. d) Variable expenses ÷ contribution margin.

Answer 1

The variable expense ratio is variable expenses ÷ sales. Option c is correct.

Step-by-step explanation:

The variable expense ratio is a financial metric used to assess a company’s variable costs as a percentage of its sales. The correct formula to calculate the variable expense ratio is variable expenses ÷ sales. By analyzing the variable expense ratio, firms can understand the portion of each sales dollar that is consumed by variable costs.

This understanding is crucial because it affects the company's profitability. If the variable expenses are controlled and kept lower than the sales prices, profitability is generally improved, assuming fixed costs are covered.

This ratio indicates how much of every sale is made up of variable costs. Contribution margin is not involved in this ratio calculation; it is the amount by which a product’s sales exceed its variable costs and is used to cover fixed costs and contribute to net profit.

Option c is correct.