Difference Between Gross Margin and Contribution Margin
Difference Between Gross Margin and Contribution Margin:
Learning Objectives:
 What is the difference between gross margin and contribution margin?
Gross Margin is the Gross Profit as a percentage of Net Sales. The calculation of the Gross Profit is: Sales minus Cost of Goods Sold. The Cost of Goods Sold consists of the fixed and variable product costs, but it excludes all of the selling and administrative expenses.
Contribution Margin is Net Sales minus the variable product costs and the variable period expenses. The Contribution Margin Ratio is the Contribution Margin as a percentage of Net Sales.
Example:
Let’s illustrate the difference between gross margin and contribution margin with the following information: company had Net Sales of $600,000 during the past year. Its inventory of goods was the same quantity at the beginning and at the end of year. Its Cost of Goods Sold consisted of $120,000 of variable costs and $200,000 of fixed costs. Its selling and administrative expenses were $40,000 of variable and $150,000 of fixed expenses.
The company’s Gross Margin is: Net Sales of $600,000 minus its Cost of Goods Sold of $320,000 ($120,000 + $200,000) for a Gross Profit of $280,000 ($600,000 – $320,000). The Gross Margin or Gross Profit Percentage is the Gross Profit of $280,000 divided by $600,000, or 46.7%.
The company’s Contribution Margin is: Net Sales of $600,000 minus the variable product costs of $120,000 and the variable expenses of $40,000 for a Contribution Margin of $440,000. The Contribution Margin Ratio is 73.3% ($440,000 divided by $600,000).
You may also be interested in other articles from “cost volume profit relationship” chapter
 Contribution Margin and Basics of CVP Analysis
 Difference Between Gross Margin and Contribution Margin
 Cost Volume Profit (CVP) Relationship in Graphic Form
 Contribution Margin Ratio (CM Ratio)
 Importance of Contribution Margin
 Change in fixed cost and sales volume
 Change in variable cost and sales volume
 Change in fixed cost, sales price and sales volume
 Change in variable cost, fixed cost, and sales volume
 Change in regular sales price
 Break even point analysis (calculation of breakeven point by contribution margin and equation method)
 Target profit analysis
 Margin of safety
 Sales Mix and Break Even with Multiple Products
 Cost Volume Profit (CVP) Consideration in Choosing a Cost Structure
 Operating Leverage and degree of operating leverage
 Assumptions of Cost Volume Profit (CVP) Analysis
 Limitations of Cost Volume Profit Analysis
Learning Objectives:
Gross Margin is the Gross Profit as a percentage of Net Sales. The calculation of the Gross Profit is: Sales minus Cost of Goods Sold. The Cost of Goods Sold consists of the fixed and variable product costs, but it excludes all of the selling and administrative expenses. Contribution Margin is Net Sales minus the variable product costs and the variable period expenses. The Contribution Margin Ratio is the Contribution Margin as a percentage of Net Sales. Example:Let’s illustrate the difference between gross margin and contribution margin with the following information: company had Net Sales of $600,000 during the past year. Its inventory of goods was the same quantity at the beginning and at the end of year. Its Cost of Goods Sold consisted of $120,000 of variable costs and $200,000 of fixed costs. Its selling and administrative expenses were $40,000 of variable and $150,000 of fixed expenses. The company’s Gross Margin is: Net Sales of $600,000 minus its Cost of Goods Sold of $320,000 ($120,000 + $200,000) for a Gross Profit of $280,000 ($600,000 – $320,000). The Gross Margin or Gross Profit Percentage is the Gross Profit of $280,000 divided by $600,000, or 46.7%. The company’s Contribution Margin is: Net Sales of $600,000 minus the variable product costs of $120,000 and the variable expenses of $40,000 for a Contribution Margin of $440,000. The Contribution Margin Ratio is 73.3% ($440,000 divided by $600,000). 

Recommended Books ! 

You may also be interested in other articles from “cost volume profit relationship” chapter


Other Related Accounting Articles:
 Importance of Contribution Margin – Advantages of Cost Volume Profit (CVP) Analysis
 Effect of Change in Variable Cost and Sales Volume on Contribution Margin and Profitability
 Limitations of CostVolumeProfit (CVP) Analysis
 Effect of Change in Variable Cost, Fixed Cost and Sales Volume on Contribution Margin and Profitability
 Effect of Change in Regular Sales Price on Contribution Margin and Profitability
 Effect of Change in Fixed Cost and Sales Volume on Contribution Margin and Profitability
 Assumptions of CostVolumeProfit (CVP) Analysis
 Cost Volume Profit Relationship – (CVP Analysis)
 Margin of Safety (MOS)
 Cost Volume Profit (CVP) Relationship in Graphic Form
Recommended Books !
Or
Download E accounting book in MSword format for just 20 $  Click here to Download