People sometimes use the terms gross margin and contribution margin interchangeably, but they’re not the same thing.
Most companies (e.g., Apple) define gross margin as the difference between net sales and cost of goods sold (or cost of sales):
Gross Margin = Net Sales – Cost of Goods Sold
Contribution margin, on the other hand, is calculated by subtracting total variable costs from net sales:
Contribution Margin = Net Sales – Total Variable Costs
Thus, both gross margin and contribution margin start with net sales and then subtract costs. But here’s the difference
• With gross margin you subtract cost of goods sold (or cost of sales)
• With contribution margin you subtract total variable costs
For a manufacturer like Apple, cost of goods sold includes some fixed costs (the fixed component of manufacturing overhead). Thus, some fixed costs are deducted when you calculate gross margin. This is a key difference, because fixed costs are never deducted when calculating the contribution margin.
Another difference is that all variable costs are subtracted from net sales when calculating the contribution margin. This includes variable selling costs like sales commissions. This is another key difference, as sales commissions are never deducted when calculating the gross margin.
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