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.