Formula for contribution margin ratio The contribution margin ratio of 40% means that Vargo generates 40 cents of contribution margin with each dollar of sales. That is, $0.40 of each sales dollar (40\% $1 ) is available to apply to fixed costs and to contribute to net income (see Decision Tools). Decision Tools The contribution margin ratio indicates by how much every dollar of sales will increase income after the break-even point. This expression of contribution margin is very helpful in determining the effect of changes in sales on net income. For example, if Vargo's sales increase $100,000, net income will increase $40,000(40%$100,000). Thus, by using the contribution margin ratio, managers can quickly determine increases in net income from any change in sales. We can also see this effect through a CVP income statement. Assume that Vargo's current sales are $500,000 and it wants to know the effect of a $100,000 (200-unit) increase in sales. Vargo prepares the comparative CVP income statement analysis shown in Illustration 5.18. Formula for contribution margin ratio The contribution margin ratio of 40% means that Vargo generates 40 cents of contribution margin with each dollar of sales. That is, $0.40 of each sales dollar (40\% $1 ) is available to apply to fixed costs and to contribute to net income (see Decision Tools). Decision Tools The contribution margin ratio indicates by how much every dollar of sales will increase income after the break-even point. This expression of contribution margin is very helpful in determining the effect of changes in sales on net income. For example, if Vargo's sales increase $100,000, net income will increase $40,000(40%$100,000). Thus, by using the contribution margin ratio, managers can quickly determine increases in net income from any change in sales. We can also see this effect through a CVP income statement. Assume that Vargo's current sales are $500,000 and it wants to know the effect of a $100,000 (200-unit) increase in sales. Vargo prepares the comparative CVP income statement analysis shown in Illustration 5.18