Final answer:
The correct formula for calculating the contribution margin ratio is (Sales − Variable costs) − Sales. This ratio is essential for businesses to determine how sales affect their profitability.
Step-by-step explanation:
The formula used to calculate the contribution margin ratio is C. (Sales − Variable costs) − Sales. The contribution margin ratio indicates what percentage of sales is available to cover fixed costs and to provide profit after variable costs have been paid. This measurement is critical for management to understand how changes in sales volumes impact profitability.
Understanding marginal costs is also vital in business. Marginal cost is calculated by taking the change in total cost, which is usually equivalent to the change in variable cost, and dividing it by the change in output. This is important because marginal costs generally rise with increased production, and comparing the marginal cost to the additional revenue from selling another unit can indicate whether that unit is contributing to profit.