Contribution margin ratio is defined as

• A. Contribution margin equals net revenue minus fixed costs.
• B. Contribution margin ratio = contribution margin divided by net revenue; used to assess profitability of service lines and guide pricing and resource allocation.
• C. Contribution margin is the same as net income.
• D. Contribution margin ratio is net income divided by total revenue.

Answer: (B)

The key idea is understanding what contribution margin and its ratio tell you about profitability and decision-making. Contribution margin is the revenue left after subtracting variable costs, not fixed costs. That remaining amount is what can cover fixed costs and contribute to profit. The contribution margin ratio takes that margin and compares it to net revenue (or sales) by dividing contribution margin by net revenue. This ratio is a handy tool for evaluating how profitable a service line is and for guiding pricing and resource allocation—because it shows how much of each dollar of revenue is available to cover fixed costs and generate profit.

Why this description fits best: it correctly defines the ratio as contribution margin divided by net revenue and highlights its practical use in assessing profitability and guiding pricing and resource decisions. The other statements mix up what is subtracted to get contribution margin (they mention fixed costs) or confuse contribution margin with net income, or misstate the ratio’s numerator or denominator.