Question

Describe how the following items are computed: a. Gross margin, and b.Contribution margin. Please be detailed.

Answer 1

a	GROSS MARGIN RATIO
	First of all Gross margin is generally used as a Financial Accounting measure
	Gross Margin or Gross Profit = Sales - COGS - Direct Expenses
	Gross Margin depicts that what is the margin that the company is maintaining after deducting the
	cost of goods sold and direct expenses from its sales. After deducting all the indirect expenses from
	gross margin the net profit is what we get
	For ex:- Sales = $500,000 and COGS is $300,000 and its direct expenses are $50,000
	Then the Gross profit will be $150,000 ($500,000-300,000-50,000)
b	CONTRIBUTION MARGIN
	First of all Contribution margin is generally used as a Management Accounting measure
	Contribution margin = Selling price per unit - Variable cost
	Contribution margin depicts that how much a particular product contributes to the overall profitability.
	Contribution margin helps to differentiate between the Fixed cost from the overall profit of the company.
	For ex:- Overall profit of a company is $80,000 which is after deducting a total cost of $120,000(Fixed cost is $40,000)
	The total unit sold is 10,000 units with a selling price per unit of $20 and the Variable cost per unit is $8.00
	So the contribution margin per unit is $12.00($20-8) and total contribution is 10,000 units*$12.00 = $120,000
	From the contribution margin after deducting fixed cost of $40,000 we will get profit of $80,000.