Conceptualization of both margins is not as crucial as their application and identification within the financial process, as well as strategic planning, whether private or business. A brief look at the conceptualization will help us greatly.
Money is a key element for our development in modern, civilized and devouring society. Therefore, the protection or protection of money is our day to day, the difference between contribution margin and gross margin will be another example of money as the engine of the world that must be protected and studied.
What is the Gross Margin?
The eponym or title of Gross Margin, is a synonym of what is mostly known as Gross Profit in margin or also, gross profit margin. This will only include income and of course the costs required by manufacturing, or production, therefore called factory costs in many cases. It will not include the remains of operations, understood as wages and capital invested in advertising or the like that the company carries, such as taxes on benefits.
A simple example: the Gross Profit, will encompass the costs directly related to the materials, direct from manufacturing, but will exclude third-party elements such as stationery used for manufacturing procedures.
These direct production costs are referred to as costs of a good sold. And they are used to produce the services that a business unit trades. It is also shown that a company generates income, starting from direct costs, such as direct contracted and used materials, directly for that purpose and in accordance with its final product.
The gross profit is calculated by deducting the goods sold from the income, and dividing the result by the income. This is later done as a percentage, multiplying the amount by one hundred.
What is the Contribution Margin?
Now, the so-called contribution margin will be the remaining income, after having previously subtracted the variant costs involved, during the manufacturing process of a certain product. This margin gives us crucial financial information.
It directly calculates the profitability of the particular or individual elements, products or articles that the company has been manufacturing and trading. Specifically, the contribution margin is used to closely monitor variable costs, including of course the cost of production, to see if the price at which an item is traded per unit is profitable.
On the other hand, but in line with what has been said, in opposition to the so-called metric of the general or total profit that is given by the gross margin. The margin contribution is usually displayed or expressed as a percentage calculation. This is not intended to be the global measure of business profitability.
However, the contribution margin can be used to analyze the variable costs of production. In turn, the contribution in margin could be used to evaluate how the income of a product varies according to the costs of the materials and thus seek a better finance.
What is the difference between contribution margin and gross margin?
At first glance we can say that the gross margin refers to the so-called gross utility. That is, without alterations or recalculation. Represented as a percentage of net sales made. In turn, the calculation of gross earnings is subject to elementary mathematical calculation.
The mathematical calculation is given by sales, subtracting the cost of goods sold. In turn, this cost of goods traded as a sale is made up of the so-called fixed costs and variants. Execrated the totality of the expenses of sale and of administrative origin.
In this order of ideas, the contribution margin is given by the simple and elementary calculation of net sales, subtracting the variable costs, both of the product and the rest of the variable period. In turn, the Contribution Margin Ratio will be the contribution margin as a percentage of the net sales made. All of this can help us calculate interest amounts such as the monthly Unemployment Insurance percentage.
