Variable Cost Ratio

See: Variable Cost.

Costs at a company can generally be split into two categories: fixed and variable.

Fixed costs remain the same, no matter what happens to production. Rent presents a good example. Whether you make one chocolate-covered banana or 1,000, the cost for your chocolate banana factory remains the same.

The other side of the expense spectrum consists of variable costs. These change with the level of production. So...bananas and chocolate count as variable costs: more production means more bananas and more chocolate.

The variable cost ratio presents the relationship between variable costs and the amount of sales a company has. Divide variable costs by net sales and you get the variable cost ratio. So if your chocolate banana factory has $2 million in variable costs and $3 million in net sales, the variable cost ratio would be 66.7%.