Question

How does contribution margin differ from gross margin? Give a specific example as part of your explanation.

Answer 1

• Contribution margin differ from Gross Margin on following main point:

--Contribution margin only takes into consideration the variable cost, while Gross Margin considers Variable as well as Fixed cost.

--All variable costs are considered including variable selling & admin expense while calculating contribution margin, while only production costs are considered for calculating gross margin.

--Contribution margin = Sales – Variable costs; while Gross Margin = Sales – Cost of Goods Sold.

• Example:

--Data

Units produced and sold		10,000
Sales Revenue		$                60,000
Production cost:
Variable	$                15,000
Fixed cost	$                   8,000	$                23,000
Selling & Admin costs:
Variable	$                   6,000
Fixed cost	$                   4,000	$                10,000

--Comparison:

Sales Revenue		$                      60,000
Less:
Variable production cost	$              15,000
Variable selling & admin cost	$                 6,000	$                      21,000
Contribution margin		$                      39,000

Sales Revenue		$                      60,000
Less: Cost of Goods Sold
Variable production cost	$              15,000
Fixed production cost	$                 8,000	$                      23,000
Gross Margin		$                      37,000