A:

Gross profit margin is an overall measure of the total profit on sales that a company makes after subtracting costs directly associated with production. Contribution margin is a measure of the gross profitability of various individual products.

Gross profit margin is a basic profitability metric. It looks at the total remaining profits after sales, minus direct production costs. It does not include operational expenses such as salaries or advertising, or other company expenses such as taxes or interest on loans. Therefore, it is not used to show a company's actual overall, or net, profitability; it only evaluates how profitable the company is in relation to the cost of goods required to manufacture a product versus sales revenue generated from total product sales. Analysts use operating profit and net profit to obtain a more complete evaluation of a company's profitability.

Contribution margin is an accounting tool that allows a company to look at one aspect of profitability for individual items that the company manufactures and sells. Specifically, contribution margin is used to review the variable costs included in the production cost of an individual item. In comparison with gross profit margin, it is a per-item profit metric, as opposed to the total profit metric given by gross margin. Like most profit metrics, contribution margin is expressed as a percentage, or ratio. The formula for calculating the contribution margin is to subtract variable production costs from revenue generated by sales of the item, and then divide that total by the revenue figure. For example, if total sales revenue from an item that the company produces is \$10,000, and variable costs for the item are \$1,000, then the contribution margin ratio is 90%. The contribution margin is not intended to be a true measure of a company's profitability, but it can be used to examine variable production costs. Companies commonly examine contribution margin to evaluate how to improve the profitability of an item, either by reducing variable production costs or by raising the item's price.

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