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.

Updated on: 27-Jul-2020


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