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Gross Profit
(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
(Net Sales minus the variable product costs and the variable period expenses).
Gross Profit is also known as Gross Margin.
The essential difference between the contribution margin and gross margin is that of fixed overhead costs that are not included in the contribution margin. This means that the contribution margin is always higher than the gross margin. contribution margin is used to take one-off decisions.
Gross margin demonstrate the value of profit gained from direct activity against the turnover instead of GP margin contribution margin shows the individual product's profitable (Product revenue-variable cost).
Gross profit margin: (Sales- COGS)/Sales
contribution margin: Net sales - variable cost
Difference between contribution margin and gross margin with the following Example:-
Company had Net Sales of, during the past year. Its inventory of goods was the same quantity at the beginning and at the end of year. Its COGS consisted of, of variable costs and, of fixed costs. Its selling and administrative expenses were, of variable and, of fixed expenses.
Contribution Margin
Net Sales (,) – {(Variable Product Cost,) + (Variable Expense,)} =,/-
Gross Margin
Net Sales (,) – {(COGS Variable,)+(COGS Fixed,)} =,/-
gross margin the result from used Absorption costing concept it mean sales price minus{(sales) - (beginning inventory + variable costs and fixed costs manufacturing - ending inventory).
while contribution margin is result from used variable costing concept it mean sales price minus {(sales) - (beginning inventory + variable costs costs manufacturing + variable sales and Administrative expenses - ending inventory)}.
Basically
Gross Margin: Is the percentage of Gross Profit against Net Sales
Gross profit margin: (Sales- COGS)/Sales
contribution margin: Net sales - variable cost
