Difference
between Gross profit and Contribution
Profit is calculated by deducting
the all related direct costs i.e. variable and fixed cost, where contribution
is calculated only by deducting variable cost. The difference between
contribution and profit has been further explained below;
1. Gross Profit
Profit takes into account
both type of cost i.e. variable cost and fixed cost. For example factory rent
will be deducted while calculating the gross profit, but the same shall not be
deducted at time of calculating contribution.
|
Sales
|
100
|
|
Material
Cost
|
50
|
|
Labor
|
10
|
|
Factory
overheads
|
10
|
|
Gross profit
|
30
|
2. Contribution
Contribution takes into
account only direct variable cost. Contribution is very effective tool for
decision making because it establishes direct link with level of activity. It
varies directly with level of activity. Contribution is basic tool for calculating
margin of safety and break even analyses.
|
Sales
|
100
|
|
Material
Cost
|
50
|
|
Labor
|
10
|
|
Contribution
|
40
|
