What is the difference between gross margin and contribution margin?

• A. Gross margin = revenue minus cost of goods sold; contribution margin subtracts variable costs to cover fixed costs.
• B. Gross margin includes fixed costs; contribution margin excludes fixed costs.
• C. Gross margin equals contribution margin.
• D. Gross margin is calculated after marketing expenses.

Answer: (A)

Gross margin measures production profitability by subtracting cost of goods sold from revenue. COGS reflects the costs tied directly to making the product, including materials, direct labor, and often fixed manufacturing overhead. This shows how much revenue remains after production costs to cover everything else.

Contribution margin, in contrast, subtracts only variable costs from revenue. Those are costs that vary with volume, such as materials and variable labor. What’s left is the amount available to cover fixed costs (like rent and salaries) and then contribute to profit.

So the key difference is the cost base used: gross margin uses COGS (production costs, including some fixed overhead), while contribution margin uses variable costs. This is why contribution margin is especially useful for pricing and product decisions, since it isolates what portion of revenue can absorb fixed costs and still profit. The other statements mix up which costs are included or excluded and when marketing expenses affect the calculation.