Gross and Contribution Margins
the concepts of gross margin and contribution margin and how companies use these measures for business analysis.According to the authors, Datar and Rajan (2018), the gross margin measures how much a company can charge for its products over and above the cost of acquiring or producing them. Contribution margin indicates how much of a company’s revenues are available to cover fixed costs. It helps in assessing the risk of losses (p. 88). Datar and Rajan (2018) go on to state gross margin and contribution margin are related but give different insights (p. 88). One such example is a company operating with a low gross margin will have low risk of loss if its fixed costs are small. What other insights or observations do you have with regard to gross margin and contribution margin? Do those insights change depending on the industry sector being considered; if so, why?
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Answer preview………. Different firms will always need to make decisions based on the costs incurred in different processes within the business. This explains the importance of cost accounting, in which case the gross and contribution margins make a critical contribution to decision making within the business. One of the most notable aspects of the concepts is their position on variable and fixed cost in the business (Horngren, Datar, & Rajan, 2014). In this case, it would be important to consider the contribution margin as being an indicator of the difference between sales and the variable costs of making the products in question. The greater the margin, the lower the variable costs of the said production…….
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