Final answer:
The variable expense ratio is calculated by dividing total variable expenses by total sales or total revenue, providing insight into the portion of sales used to cover variable costs.
Step-by-step explanation:
The equation used to calculate the variable expense ratio using total values is total variable expenses divided by total sales (or total revenue). The variable expense ratio is a useful metric for businesses to understand what portion of their total sales is consumed by variable costs. It is important because it helps to determine the business's ability to achieve profitability once fixed costs are covered. Variable costs vary with the level of output; they include items like raw materials and labor directly associated with the production of goods or provision of services. In contrast, fixed costs, such as rent and salaries of non-production staff, do not change with the level of output.
For example, if a barber shop has variable costs of $80 per barber each day and the total revenue from services (haircuts) for the day is $400, then the variable expense ratio would be calculated as $80 divided by $400, giving a ratio of 20%. This indicates that 20% of the sales revenue goes towards covering the variable costs associated with delivering the service.