Chapter 2, Gross Margin VS Contribution Margin (Deck 2.7)

Question 1

What is the Gross Margin Format used for?

What is the Main focus on the Gross Margin Format?

Answer 1

The Gross Margin Format is used for GAAP reporting.

This is what we learn in Financial Accounting. It is what is reported to the outside world and what the auditor’s audit.

The main focus on the Gross Margin Format is The Gross Margin.

Question 2

How do you calculate Gross Margin?

Answer 2

You calculate Gross Margin by subtracting Cost of Sales from Sales.

Gross Margin = Sales - Cost of Sales

Question 3

After calculating Gross Margin, what do you subtract from GM?

Give 3 Examples of this.

Answer 3

After calculating GM, you subtract Period Costs.

Examples of Period Costs: Selling, General, and Admin.

Question 4

What does Gross Margin - Period Costs = ?

Answer 4

Gross Margin - Period Costs = The Operating Income

Question 5

What is Gross Margin bad at doing?

Answer 5

Gross Margin is bad at providing analysis internally to the company.

Question 6

What 2 Types of Costs are Subtracted from Sales in the Contribution Margin Format?

Answer 6

All Variable Costs are Subtracted from Sales in the Contribution Margin Format.
This includes:
1. Product Costs
2. Period Costs

Question 7

In the Contribution Margin Format. What does Sales - Variable Costs = ?

Answer 7

In the Contribution Margin Format, Sales - Variable Costs = The Contribution Margin

Question 8

What do you subtract from the Contribution Margin?

What does that Equal?

Answer 8

You Subtract the Fixed Costs from the Contribution Margin.

This Equals the Operating Income.

Contribution Margin - Fixed Costs = Operating Income

Question 9

What is the Contribution Margin Format used for?

Answer 9

The Contribution Margin Format is used for Operational Analysis. Internally to the Company.

Question 10

Identify the Type of Margin:

Sales 100,000
- Cost of Sales 80,000
= Gross Margin 20,000
Selling, General and Admin 10,000
Variable
Fixed
Operating Income 10,000

Answer 10

This is The Gross Margin Format.

Question 11

Identify the Type of Margin:

Sales 100,000
- Cost of Sales
- Variable Commissions 40,000
= Contribution Margin 60,000
- Fixed Costs 50,000
= Operating Income 10,000

Answer 11

This is the Contribution Margin Format.