# Contribution margin vs Gross margin In business, there are many different terms that can be confusing. Two of these terms are contribution margin and gross margin. Though they sound similar, they have very different meanings. Contribution margin is the amount of money a company makes from its sales minus the costs of producing those sales. Gross margin, on the other hand, is the difference between a company’s revenue and the cost of goods sold. In order to understand these concepts better, let’s take a look at an example…

## What is contribution margin and gross margin

Contribution margin and gross margin are two important financial metrics that businesses use to evaluate their performance.

Contribution margin is a measure of the profitability of a product or service. It represents the amount of revenue that is left over after all variable costs have been deducted. contribution margin can be used to assess the profitability of individual products or services, as well as to make pricing decisions.

Gross margin is a measure of the profitability of a business as a whole. It represents the percentage of revenue that is left over after all variable and fixed costs have been deducted. Gross margin can be used to assess the overall financial health of a business and to make strategic decisions about pricing and investment.

Both contribution margin and gross margin are important measures of profitability, and businesses should track both metrics in order to get a complete picture of their performance.

## How to calculate each

To calculate contribution margin, start by totaling all your variable costs for a period of time. Then, subtract this amount from your total revenue for that same period of time. The resulting figure is your contribution margin. For example, if your company had \$100,000 in sales revenue and \$60,000 in variable costs over a certain period of time, your contribution margin would be \$40,000.

To calculate gross margin, start by totaling all your costs for a period of time, both variable and fixed. Then, subtract this amount from your total revenue for that same period of time. The resulting figure is your gross margin. For example, if your company had \$100,000 in sales revenue and \$80,000 in total costs over a certain period of time, your gross margin would be \$20,000.

Both contribution margin and gross margin are important calculations for any business owner to understand. By knowing these numbers, you can make informed decisions about pricing, marketing, and other aspects of running your business.

## The difference between contribution margin and gross margin

The terms “contribution margin” and “gross margin” are often used interchangeably, but they actually refer to different things. Gross margin is the difference between the selling price of a product and the cost of goods sold. Contribution margin, on the other hand, is the difference between the selling price of a product and all other variable costs associated with its production (e.g., materials, labor).

In other words, gross margin represents the portion of each sale that is available to cover fixed costs, while contribution margin represents the portion of each sale that is available to cover both fixed and variable costs. As a result, contribution margin is always lower than gross margin. For example, if a product has a selling price of \$100 and a cost of goods sold of \$80, its gross margin would be \$20. If that same product has additional variable costs of \$10 (e.g., materials, labor), its contribution margin would be \$10.

## Examples of contribution margin and gross margin

The term margin refers to the difference between two numbers, typically revenue and costs. The gross margin is the margin before accounting for operating expenses, while the contribution margin is the margin after accounting for operating expenses. For example, if a company has \$100 in revenue and \$80 in costs, its gross margin is 20% and its contribution margin is 0%. To calculate the gross margin, simply divide the revenue by the cost. To calculate the contribution margin, subtract the total operating expenses from the revenue. In our example, if the company had \$10 in operating expenses, its contribution margin would be 10%. As you can see, the contribution margin is always lower than the gross margin. This is because operating expenses must be accounted for before calculating the final profit figure. However, both margins are useful for evaluating a company’s financial performance.