What Is the Difference Between Gross Margin and Contribution Margin?

In: Business and Management

Submitted By vic584
Words 269
Pages 2
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.

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).
Take our Financial Ratios…...

Similar Documents

What Is the Difference Between Work and Fun?

...What is the difference between work and fun? In the world we live in today, gambling is a professional career to some, whilst others gamble for leisure, a combination of necessity and pure enjoyment. However there is hardly any single moment where a person just fell into being a professional gambler, but there will be some people who realized that they didn’t have any other source of income. The truth is that there are many thousands of people around the country who make a good living exclusively from gambling. It is not easy, but it can be done. In order to become a professional gambler, he/she needs to practice, practice and practice some more. He/she needs to have the rules of whatever game you are planning on playing down cold. Once he/she knows the rules, he/she needs to practice, either live or online. In addition to practice, one also needs to have discipline. Discipline comes in many forms. Can you maintain your focus so that you make the right decisions? Can you maintain and stick to a proper budget? Discipline and practice is normally not enjoyable by any party, however obliged to do in order to become skilled and successful in the profession of gambling thus should be considered as work. When you are betting on sports, the number one priority that you should have is good solid research. It is difficult enough even with the greatest knowledge and excellent research to make accurate bets at a successful ratio, without research......

Words: 605 - Pages: 3

Margin Call

...Margin Call J.C. Chandler’s 2011 film Margin Call examines the actions of an investment firm’s key decision makers during the earliest stages of the most recent financial crisis. Chandler does a good job with the characters of this movie he isn’t necessarily looking for a villain in a mess like this nor any lengthy explanations; he’s going deeper than that. He goes more for societal costs of high finance, the power of self-rationalization, and the easy embrace of personal corruption. The movie is filled with business lessons that go beyond the investment world. One theme of the film centers on business ethics and whether personal interest should trump customer/employee investment. Clearly, the decision made by John Tuld and senior management demonstrates that everybody is out for themselves. Personal investors are at the mercy of the individuals and the firms they invest with. The ease with which Tuld makes his decisions is scary to any business ethical viewer. With unqualified statements such as, “its just money” the audience begins to understand that the financial system can be an unfair game. In contrast Peter’s boss, Sam Rogers’ ethical implications of how the company plans to resolve its problems are almost more than he can handle. Sam stumbles upon the issue triggering the crisis, it’s one thing to be shocked at the ramifications of what’s about to unfold. But it doesn’t mean one’s outrage can’t be set aside when personal survival is on the line, an......

Words: 705 - Pages: 3

What Is the Difference Between Causation and Correlation

...What Is The Difference Between Causation and Correlation? The major discrepancy concerning causation and correlation is the power and measure to which two things are associated and the assurance with which anybody can institute a underlying relationship. Basically when you say one thing causes another, you are saying that there is a direct line between that one thing and the result. Cause means that an action will always have a predictable reaction. Once you describe correlation, the expressions cause and correlation grow to be easier to comprehend. If you see a correlation connecting two things, you can see that there is a affiliation between those two things. One thing does not automatically result in the other thing occurring, but it may increase likelihood that something will occur. The way to understand the difference of cause and correlation can best be understood by an example. For instance, “Violent video games cause violent behavior.” According to all research on this matter, this statement is not true, due to the use of the word causes in the sentence. Research has shown that violent video games may influence violent behavior. The correlation between violent video games and violent behavior some researchers have shown that there is a connection/correlation there. Violent games may influence others to act in more hostile but they are not the only reason and sometimes not even a factor for predicting violence. I believe that it really have a great impact on our...

Words: 342 - Pages: 2

What Are the Differences Between Newspapers and Magazines?

...press is one of the oldest categories of media and communication. Again, print also has such types of it as newspapers and magazines. This essay is aimed to distinguish and determine the most important differences between newspapers and magazines. Firstly, it is necessary to define general distinctions between newspapers and magazines. Newspapers are periodic editions and publications issued permanently, temporarily or “just-one-time”. Usually newspapers have not stapled sheets with a variety of articles, texts, and images of relatively small size. In general, newspapers dedicated primarily to current events of modern politics, culture, economics, science, sports and so on; and newspaper can be devoted to one particular of the areas and topics based on social conditions of the place where it is issued. Normally newspapers are compactly organized and structured in terms of physical size, and newspapers are also light weighted, so it is comfortable for readers to store them and they can be easily carried. Newspapers are made from soft paper while magazines are made from glossy paper. Magazines are also mainly periodic editions, which include a number of works by different authors, articles, and other documents, unified in one framework and papers bound together in the spine. Difference in attractiveness of magazines and newspapers also depends on many factors such as appearance, size, content, price and others. Magazines are more colorful than newspapers, because newspapers......

Words: 1398 - Pages: 6

Budgeting and Planning - Contribution Margin

...University Planning & Budgeting – Contribution Margin ACCT310-1302B-06 7/7/2013 Consider the following scenario: Andre has asked you to evaluate his business, Andre’s Hair Styling. Andre has five barbers working for him. (Andre is not one of them.) Each barber is paid $9.90 per hour and works a 40-hour week and a 50-week year, regardless of the number of haircuts. Rent and other fixed expenses are $1,750 per month. Hair shampoo used on all clients is .40 per client. Assume that the only service performed is the giving of haircuts (including shampoo), the unit price of which is $12. Andre has asked you to find the following information. 1. Find the contribution margin per haircut. Assume that the barbers' compensation is a fixed cost. Show calculations to support your answer. Formula: Cost of haircut – variable cost (shampoo) = contribution margin $12 - $.40 = $ 11.6 Contribution Margin 2. Determine the annual break-even point, in number of haircuts. Support your answer with an appropriate explanation. Show calculations to support your answer. The break-even point is going to be the point in which your gains are equal to your losses. Anything past this point is profit for your business. Formula: Total Fixed Costs / Contribution Margin = Break-even Point 5 (employees) * $9.90 * 40 * 50 = $99,000 + 1750 (monthly costs) * 12 (months) = $120,000 120,000 / 11.6 = 10,334.83 Haircuts are needed to break even 3. What will be the operating income......

Words: 429 - Pages: 2

Profit Margin

...Profitability Indicator Ratios: Profit Margin Analysis In the income statement, there are four levels of profit or profit margins - gross profit, operating profit, pre-tax profit and net profit. The term "margin" can apply to the absolute number for a given profit level and/or the number as a percentage of net sales/revenues. Profit margin analysis uses the percentage calculation to provide a comprehensive measure of a company's profitability on a historical basis (3-5 years) and in comparison to peer companies and industry benchmarks. Basically, it is the amount of profit (at the gross, operating, pre-tax or net income level) generated by the company as a percent of the sales generated. The objective of margin analysis is to detect consistency or positive/negative trends in a company's earnings. Positive profit margin analysis translates into positive investment quality. To a large degree, it is the quality, and growth, of a company's earnings that drive its stock price. Formulas: |[pic] | |[pic] | |[pic] | |[pic] | Components: |[pic] | |[pic] | |[pic] | |[pic] ...

Words: 582 - Pages: 3

Profit Margin

...Profit margin From Wikipedia, the free encyclopedia Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.[1] \mathrm{Net\ profit\ Margin} = {\mathrm{Net\ Profit}\over\mathrm{Revenue}} where Net Profit = Revenue - Cost profit percentage is calculated with cost price taken as base. Profit margin is calculated with selling price (or revenue) taken as base. Profit margin is the percentage of selling price that turned into profit, where as profit percentage is the percentage of cost price that one gets as profit on top of cost price. So while selling something one should know what percentage of profit will he get on a particular investment so companies calculate profit percentage to check what is ratio of profit on the basis of cost. The profit margin is mostly used for internal comparison Suppose you buy something for $100 and sell it off for $150. cost price = $100 selling price (revenue) = $150 profit = $150 - $100 = $50 profit percentage = 50% (profit as percentage of cost price) profit margin = 33.33% (profit as percentage of selling price or revenue) The profit margin is mostly used for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses' operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so...

Words: 299 - Pages: 2

Margins

...worker? Produce one more unit of output? Purchase one more slice of pizza? This is what is known as a marginal change. To make a good decision, we compare the marginal benefit, the additional benefit resulting from a small increase in some activity, with the marginal cost, the additional cost resulting from a small increase in some activity. If the marginal benefit is greater than the marginal cost, we want to increase the level of the activity. Doing so will increase our total well-being by the difference between the marginal benefit and the marginal cost. If the marginal benefit is less than the marginal cost, we want to reduce the level of the activity. If they are equal, we are at the optimal amount of the activity. A marginal change refers to a small change in some activity. You can think of a marginal change as taking the next step in a logical sequence. You would never, for instance, compare the salary of someone with a Ph.D. against someone who didn’t finish high school. Why not? These aren’t two logical options. A person doesn’t decide to either earn a Ph.D. or drop out of high school. She decides whether to drop out of high school or get a high school diploma. She next decides whether to go to college or not. Upon graduating college she decides whether to take a job or go to graduate school. These are each sequential steps, and thus we can make relevant comparisons between them. A person will continue to go to school as long as the marginal......

Words: 709 - Pages: 3

Revised Inome Statement, the Contribution Margin Pproach

...Statement, The Contribution Margin Approach ACC403-Principles of Accounting Module 2 - CASE 1. Prepare income statements under variable (contribution margin) and traditional (absorption) costing for the year ended December 31, 2008. The E Company Income statement for year ending December 31, 2008 Absorption / Contribution Product Information: | | | | | | Units Produced | 400,000 | | Units Sold | 345,000 | | Selling Price per Unit | $19.00 | | Direct Material Cost per Unit | $3.50 | | Direct Labor Cost per Unit | $1.40 | | Variable Selling Costs per Unit | $1.20 | | Fixed Manufacturing Costs | $1,600,000 | | Fixed Selling & Administrative Costs | $1,200,000 | | | | | | | | Absorption (GAAP) Income | | | | | Revenues (Sales) | | $6,555,000 | Cost of Goods Sold (Cost of Sales) | | 3,070,500 | Gross Profit (Gross Margin) | | $3,484,500 | Selling & Administrative Expenses | | 1,614,000 | Operating Income | | $1,870,500 | | | | | | | Contribution Margin Income Statement | | | | | Revenues (Sales) | | $6,555,000 | Variable Costs: | | | Direct Material | $1,207,500 | | Direct Labor Cost | 483,000 | | Variable Selling Expenses | 414,000 |   | Total Variable Costs | | $2,104,500 | Contribution Margin | | 4,450,500 | Fixed Costs | | 2,800,000 | Operating Income | | $1,650,500 | | | | 2. What are E's contribution margin ratio, gross......

Words: 1057 - Pages: 5

Margin Call

...Margin Call Margin call is an independent drama film of a investment bank firm that takes place over a 36 hour period after discovering a huge financial crisis that is about to occur. Each character takes part in a story that shows their emotions and actions of how to handle an economic downturn. In the beginning of the movie, many of the employees are being laid off and that includes Head Risk Manager, Eric Dale. Before he leaves, he hands Junior Risk Analyst, Peter Sullivan, a USB of his project he has been working on and tells him to “be careful”. Peter later continues on the project that Eric Dale hasn’t completed and then reaches a conclusion that is very problemental to the firm and economy. The mortgage-backed securities which they possess are losing value which will be detrimental to the firm. Peter cannot reach Dale so instead contacts, Seth, Junior Risk Analyst, and Will, Head of Trading, to take a look at his outcome. Soon, this problem is discovered and all the head of the company, including Chief Executive Officer, John Tuld, is forced to have a meeting at 3 in the morning to discuss what actions should be taken. They are conflicted on a solution to save the company but need to do whatever it takes. After a discussion, they then reach a conclusion to sell off toxic securities before the news spreads of their worthlessness. The market opens and they are capable of selling the assets at a discounted price even though many clients are suspicious and will...

Words: 2037 - Pages: 9

Margin Call

...Margin call is an american movie, realizd by JC Chandor in 2011 The story This movie explains how crisis in 2008 happened in a financial institution in New York. The company exists since 137 years with John Tuld as the Chief Executive Officer. The leader of trading operation is Sam Rogers. He is in the company since 34 years. First of all, there is the layoff of Eric Dale, the financial analyst. We can see a comparison with Lehman Brothers when bankers leave the company with a case under arms and the telephone line were cut instantaneously. While Dale is being escorted out, he gives Peter a USB memory stick with a project he had been working on, telling him to "be careful" just as he boards the elevator. During the night, Sullivan finishes Dale's project and discovers that current volatility in the firm's portfolio of Mortgage Backed Securities (MBS) will soon exceed the historical volatility levels of the positions. Because of excessive leverage, if the firm's assets decrease by 25% in value, the firm will suffer a loss greater than its market capitalization. He also discovers that, given the normal length of time that the firm holds such securities, this loss must occur. Sullivan alerts Emerson, who calls floor head Sam Rogers. The employees remain at the firm for a series of meetings with progressively more senior executives, including division head, Jared Cohen, the chief risk management officer, and finally CEO John Tuld. Cohen's plan is for the firm to quickly...

Words: 1002 - Pages: 5

Marketing Margins and Costs

...Marketing Costs And Margins By performing certain functions and services, various marketing organisations and agencies make it possible for commodities, produce and products to move from producers to consumers. However, these functions incur costs, often of considerable magnitude. Discussions on margins and costs usually include the topic of marketing efficiency. An efficient marketing system is one capable of moving goods from producer to customer at the lowest cost consistent with the provision of the services that customers demand. Once the costs involved in marketing have been identified then means can be devised to make the system more efficient. Increases in efficiency can be achieved in a variety of ways: by increasing the volume of business using improved handling methods, investing in modern technology, locating the business in the most appropriate place, implementing better layouts and working practices in production, improving managerial planning and control and/or by making changes in marketing arrangements (e.g. through horizontal or vertical integration). Objectives Of The Chapter The chapter is aimed at enabling the reader to:- * Understand what the term marketing efficiency means and the varied forms it can take * Distinguish between marketing efficiency and marketing effectiveness * Identify the factors which influence the level of efficiency and level of effectiveness of a marketing system, and * Determine how marketing costs and margins......

Words: 12535 - Pages: 51

Form of Gdp and What Is the Difference Between

...Gradable Assignment 1 1.     Full form of GDP and what is the difference between GDP per Capita Ans: GDP–Gross Domestic Product GDP per Capita – An estimate of an individual spends as a consumer compared to the total population spending on products and services. GDP is gross domestic product, the total economic output of a country, i.e., the amount of money a country makes. GDP per capita is the total output divided by the number of people in the population, so you can get a figure of the average output of each person, i.e., the average amount of money each person makes. 2.     Define or explain Purchase Power Parity in two lines Ans: Purchasing power parity (PPP) is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. 3.     Which of these are Formal Institutions and Informal Institutions Ans: a.     Laws- b.    Ethics- c.     Culture- d.    Regulations- e.     Norms- f.     Rules- 4.     Name two countries under Theocratic Laws Ans: Vatican City 5.     Name at least two of the three kinds of economies Ans: An economy is a system whereby goods are produced and exchanged. Without a viable economy, a state will collapse. There are three maintypes of economies: free market, command, and mixed. 6.     Name two characteristics each of Low Context and High Context cultures Ans: High Context Cultures 1. Space is communal; people......

Words: 698 - Pages: 3

Unplanned Event and Events at the Margin

...Introduction This essay is written by an author that agrees that unplanned event and events at the margin should be concern. The essay will begin with the author’s point of views in regards toward unplanned events and events at the margin with possible outcomes using examples. Subsequently some examples of planned events will be also illustrated by the author to compare between planned and unplanned events. At the end of this essay, the author also provide some recommendation to solve the issue with unplanned events and events at the margin if they happen. In event studies, events is defined as an occurrence that only happened at a specific time and location due to a certain circumstances. These can be classified into three types of categories which are unplanned events, events at the margin and lastly planned events. Unplanned event Firstly the definition of unplanned events by the author is events that happened unexpectedly without any form of planning beforehand. Due to the result that this events do not have any planning, thus the outcome can be dangerous and unpredictable. The only unplanned events that is not involve in events studies would only be classified as accident and natural disaster. The purpose of these unplanned events is self-defined and most of the time the people who are involved in it are unclear about the intention. Once these events have been set in motion without any management, the result can be unpredictable and dangerous as there is no......

Words: 1171 - Pages: 5

Managerial Economics - What Is Working Capital State the Difference Between Gross Working Capital and Net Working Capital

...Marginal Returns’ 5. What is ‘Cost benefit analyses? Justify its use in the implementation of developmental projects. Section – B (Marks – 25) Attempt all questions – 1. What is ‘Segmentation’? Explain Product segmentation and Market segmentation concept. 2. What is ‘Wholesaling’? Discuss various benefits of Wholesaling. 3. Explain different Features of Perfect Competition. 4. Cost Volume Profit Analysis. 5. What is Capital Rationing? Section – C (Marks – 50) Attempt any five questions – 1- Explain in detail the nature and scope of Managerial Economics. How Micro Economics differs from Managerial Economics? 2. What is Empirical Production Function? Explain the optimum combination of inputs with diagrams. 3. What is Cost of Capital? Explain its structure and role in inter- national competitiveness. 4. What is Elasticity of Demand? Explain Price, Cross and Income Elasticity of Demand used in managerial decision making process. 5. What do you mean by Monopoly? How price and output is determined in short and long run in Monopoly Competition? 6. Describe the Oligopoly Model in detail. 7. Explain management of foreign exchange with special reference to India Financial Management Section – A (Marks – 25) Attempt all questions 1. Write an important condition for the adjustment of the cost of debt. 2. What does the cost of equity capital indicate? 3. Explain Capital Budgeting? What is post completion......

Words: 1096 - Pages: 5