[jerryterryand]

Contribution Margin vs Gross Profit - can someone give me the differences and the shortcomings?

[hamzashakaa]

Gross profit equals sales minus variable and fixed manufacturing costs (Absorption costing). However, contribution margin equals sales minus variable manufacturing costs (variable costing). The contribution margin is the remaining amount that will contribute in covering fixed costs.

The use of contribution margin is not allowed under US GAAP and IFRS. Accordingly, it is used for internal reporting purposes and it is better than the use of gross profit because by not including the fixed costs in the calculation of contribution margin companies are able to make better decisions regarding profitability and product mix. Moreover, operating income is directly related to the level of sales and is not affected by changes in inventory levels. This prevents managers from hiding costs on the balance sheet by increasing production as in the case of using gross profit (absorption costing)

[jerryterryand]

Thanks. :)

[jerryterryand]

Shokran.:)