Can someone just explain gross margin and contribution margin? it's formulas and use/difference? i don't really understand it fully
- Anonymous8 years agoFavorite Answer
The gross margin is also known as gross profit. It's the profit figure before other (operating) expenses and other income are taken into account. NB: Gross profit is equal to Sales - COGS. However, net profit is equal to Gross profit + other income - operation expenses.
Gross margin helps an entity to assess its profitability in regards to its sales and COGS. The sales figure is only comprised of sales made during the ordinary course of business by providing services/selling goods. No other income or expenses are taken into account. The gross margin helps us to assess whether the business is selling at a good price (is it higher or lower to the budgeted selling price?) and whether the business is buying at a good price from suppliers (is the business paying more or less for purchases (cost of sales) in comparison to budgeted figures?)
Contribution margin is the margin before fixed costs are taken into account.
The contribution is useful to determine break-even point: Fixed costs / CM per unit = Break-even point in units.
Gross margin is more related to financial accounting, whereas contribution margin is related to management accounting.