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Distinguish between contribution margin and gross margin.
The major differences between contribution margin and gross margin are as follows −
Contribution Margin
It is used by pricing decision (whether product line is making profits or not).
Contribution margin = difference between sales and variable costs divides by sales.
It analyses profit metric per item.
Only variable cost is considered for calculations.
It determines the margin for production, where only variable costs are present.
It detects variable costs and its percentage included in margin.
It is useful for multiple scenario analysis.
Gross Margin
Whether production cost is covered by its sales or not.
Gross margin = difference between revenue and Cost of goods sale/revenue.
It analyses total profit metric.
It considers both fixed and variable cost.
It determines cost which is associated in manufacture of product.
It detects both variable cost and fixed cost and their percentages in the margin.
It is used to calculate projections/historical calculations with specific sale value.
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