Business Building Blocks – Basic of Costing

​Following are the direct definition of following terms:

  1. Sales 
  2. Cost price
  3. Markup
  4. Gross Profit
  5. Gross Profit margin 
  6. Gross Contribution margin 

Below are simply the first definition from search. 




plural noun: sales

  1. 1.


    “we withdrew it from sale”

    synonyms: selling, vending, disposal; 

cost price


  1. the price at which goods are or have been bought by a merchant or retailer.




  1. 1.


    “a mark-up of 50 per cent”



Gross Contribution Margin is Net Sales minus the variable product costs and the variable period expenses. The Contribution Margin Ratio is the Contribution Margin as a percentage of Net Sales.

Let’s illustrate the difference between gross margin and contribution margin with the following information: company had Net Sales of $600,000 during the past year. Its inventory of goods was the same quantity at the beginning and at the end of year. Its Cost of Goods Sold consisted of $120,000 of variable costs and $200,000 of fixed costs. Its selling and administrative expenses were $40,000 of variable and $150,000 of fixed expenses.

The company’s Gross Margin is: Net Sales of $600,000 minus its Cost of Goods Sold of $320,000 ($120,000 + $200,000) for a Gross Profit of $280,000 ($600,000 – $320,000). The Gross Margin or Gross Profit Percentage is the Gross Profit of $280,000 divided by $600,000, or 46.7%.

The company’s Contribution Margin is: Net Sales of $600,000 minus the variable product costs of $120,000 and the variable expenses of $40,000 for a Contribution Margin of $440,000. The Contribution Margin Ratio is 73.3% ($440,000 divided by $600,000).