PV Ratio vs. Contribution Margin: What's the Difference?

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This is a common point of confusion. The simplest answer is:

What it is: The total money left from sales after paying all variable costs.
Formula:Sales - Variable Costs
Example: You sell a product for $10. The variable cost is $6. Your Contribution Margin is $4.
Main Use: To find the break-even point in units (Fixed Costs / Contribution Margin per unit).

What it is: The proportion of sales that becomes contribution.
Formula:(Contribution / Sales) × 100
Example: Using the numbers above, ($4 / $10) × 100 = 40%. Your PV Ratio is 40%.
Main Use: To find the break-even point in sales value (Fixed Costs / PV Ratio).

In short, they measure the same concept but in different terms. The is just the **** expressed as a percentage of the selling price ($10).

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