Contribution margin vs. gross margin

Question

Justin Parker · Accepted Answer

The difference between contribution margin and gross margin is that contribution margin refers to the amount of money earned by each sale that generates income for a company, while gross margin refers to a company's profitability as determined by calculating the difference between revenue and the cost of selling products.

Contribution margin and gross margin are both financial metrics that are used by companies to determine the profitability of their businesses.

The contribution margin has to do with the profit made from each sale of a product or service that contributes to covering a company's fixed costs. To calculate a contribution margin you must subtract the sales price of a product from the variable costs of the product or service.

Gross margin measures profitability by calculating the difference between revenue earned and the cost of goods sold (COGS). This calculation provides a percentage of each sale representing an organization's profit before it accounts for its overhead expenses.

Key Takeaways:

Contribution Margin	Gross Margin
Contribution margin has to do with the profit made from each sale of a product or service that contributes to covering a company's fixed costs.	Gross margin measures profitability by calculating the difference between revenue earned and the cost of goods sold (COGS).
To calculate a contribution margin you must subtract the sales price of a product from the variable costs of the product or service.	The calculation of gross margin provides a percentage of each sale representing an organization's profit before it accounts for its overhead expenses.
A contribution margin indicates how profitable a company's specific product or service is.	Gross margin displays a company's ability to generate income and manage expenses.