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How can the contribution margin ratio be used in decision-making?
The contribution margin ratio is defined as the difference between an organization's sales and the variable cost. The ratio that comes out shows the available money to cover fixed costs. The higher the contribution margin ratio, the more cash per item sold is accessible to cover the wide range of various costs. In today's business, the contribution margin ratio is being used to set a certain kind of choices. It helps to decide the addition and subtraction of the product line. It helps in determining the price of the product and assists in pricing a product. It also helps in deciding how to structure deals commissions. Above all, it is widely recognized as it helps in contrasting items and figuring out which to keep and which to dispose of. Not only this, it is used in break-even analysis. When change is introduced, it can be used to estimate the effect on profits in sales revenue.
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