In CVP analysis, gross margin is a less- useful concept than contribution margin”. Do you agree? Explain briefly.
Yes, because gross margins are calculated after subtracting variable and fixed production costs, while contribution margin is the difference between total revenues and total variable costs. It means, gross margin calculations highlight the difference between production and nonproduction costs, while contribution margin calculations highlight the difference between fixed and variable costs. The crucial distinction between the gross margin and contribution margin is that fixed overhead costs are excluded in the contribution margin. Therefore, contribution margin is considered to be a more useful concept than the gross margin in CVP analysis. (Horngren, 2009)
The gross margin concept is the more conventional approach to determine how much a business makes a profit from its sales efforts, but is likely to be incorrect, as it depends upon the fixed cost allocation method. Hence, the contribution margin concept is the better-suggested way of analysis, as it gives way a better analysis of how much money a business actually earns from its sales, which can then be used to pay off fixed costs and generate a profit.
Bibliography
Horngren, C. T. (2009). Cost Volume profit analysis. In Cost Accounting: A Managerial Emphasis. New Dehli, India: Pearson.
