Is it desirable to have a higher variable rate or contribution rate?

Question

I work at a restaurant and have calculated our variable rate at about .549 which leaves the .451 for the contribution rate? I know that the contribution rate is all fixed costs including fixed labor and profit so I would think that it would be desirable to have a higher CR. Is this correct or am I missing something? Should the VR be a higher percentage though so that it will go down as sales go down? HELP

Answer 1

What confuses me is you say profit is part of fixed costs? Profit isn't a cost, it's what's left over after the costs, either fixed or variable. Here's an easy equation that might make it easier to understand:

Revenues - Variable Costs - Fixed Costs = Profit

It sounds like the place you work has it's own terms (i've never heard of contribution rate for example), but the principles are the same. If your "contribution rate" is high, your profit will be really high with high sales and really low with low sales.

If your "variable rate" is high, your profit will not change very much with changes in sales. Typically, the less fixed costs you have the better, because then if you have low sales your losses will not be as big.

Good luck!