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# Compute the Gross Margin and Contribution Margin

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The following information has been provided by the Evans Retail Stores, Inc., for the first quarter of the year:

Sales \$350,000
Variable selling expense 35,000
Fixed selling expenses 25,000
Cost of goods sold (variable) 160,000

The gross margin of Evans Retail Stores, Inc. for the first quarter is:
A) \$210,000.
B) \$140,000.
C) \$220,000.
D) \$190,000.

The contribution margin of Evans Retail Stores, Inc. for the first quarter is:
A) \$300,000.
B) \$140,000.
C) \$210,000.
D) \$190,000.

The total contribution margin decreases if sales volume remains the same and:
A) fixed expenses increase.
B) fixed expenses decrease.
C) variable expense per unit increases.
D) variable expense per unit decreases.

#### Solution Preview

The gross margin of Evans Retail Stores, Inc. for the first quarter is:
A) \$210,000.
B) \$140,000.
C) \$220,000.
D) \$190,000.

The gross margin, a measure under absorption accounting, is the excess of sales revenues over the cost of goods sold. In this case, the gross margin is:

Sales \$350,000
Cost of goods sold (variable) 160,000
Gross margin 190,000 (\$350,000-\$160,000) Answer D

The contribution margin of Evans Retail ...

#### Solution Summary

This solution illustrates how to compute the gross margin and contribution, and discusses the effect of changes in fixed and unit variable costs on the contribution margin.

\$2.19

## Absorption Income vs Contribution Margin Income

1. What is the difference in calculation between the absorption costing and variable costing approaches?

2. Can you give specific benefits to be derived from using the information from computing gross profit on sales as opposed to contribution margin?

3. Is net income always going to be the same regardless of the accounting approach?

4. Why don't we use the contribution margin format for external reporting?

5. Which income statement is classified by function, and which one is classified by behavior?

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