Final answer:
The CM ratio is the percentage of each sales dollar that contributes to covering fixed costs and generating profit. When the CM ratio increases, it leads to a higher profit, and when it decreases, it leads to a lower profit.
Step-by-step explanation:
The relation between profit and the Contribution Margin (CM) ratio can be explained by understanding how changes in the CM ratio affect profit.
The CM ratio is the percentage of each sales dollar that contributes to covering fixed costs and generating profit. It is calculated by dividing the contribution margin by the sales revenue.
When the CM ratio increases, it means that each sales dollar contributes more towards covering fixed costs and generating profit. As a result, an increase in the CM ratio will lead to a higher profit. On the other hand, a decrease in the CM ratio will lead to a lower profit.