Question

How does the total contribution margin (unit contribution margin x total number of units sold) differ from the gross margin often seen on companies' financial statements?

Answer 1

Gross Margin is the Gross Profit as a percentage of Net Sales. The computation of the Gross Profit is: Sales minus Cost of Goods Sold. The Cost of Goods Sold comprises of the fixed and variable product costs, however it prohibits the greater part of the selling and administrative expenses.

Contribution Margin is Net Sales minus the variable production costs and the variable time frame expenses. The Contribution Margin Ratio is the Contribution Margin as a percentage of Net Sales.

How about we show the contrast between gross margin and contribution margin with the accompanying data: the organization had Net Sales of $600,000 amid the previous year. Its stock of goods was a similar amount toward the start and toward the finish of the year. Its Cost of Goods Sold comprised 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 organization'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 separated by $600,000, or 46.7%.

The organization'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 partitioned by $600,000).