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Contribution margin is defined as selling price minus variable costs. Gross margin (or gross profit) is...

Contribution margin is defined as selling price minus variable costs. Gross margin (or gross profit) is defined as selling price less cost of sales. Discuss which of these measurements of a product's profit is a better measure of profitability and why?  

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Answer #1

Contribution margin is depicted as Sales - Variable costs, Here the variable costs shall include all the costs which are varies with the no. of units produced.However in case of Gross margin which is depicted as Sales - Cost of sales the cost of sales shall include the purchase costs and all the costs(variable and fixed) which are directly attributable to the production process or product.

Now since the contribution margin only takes into consideration Variable costs hence it will be a better measure of profitability then the Gross margin measurement,also known as absorption costing.

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