Answer
I agree with the statement. In CVP (Cost-Volume-Profit) analysis, contribution margin is a more useful concept than gross margin. Gross margin only considers the difference between sales revenue and the cost of goods sold (COGS), while contribution margin goes a step further by subtracting variable expenses from sales revenue. Contribution margin directly reflects the amount available to cover fixed costs and contribute to profit. This makes it a better tool for analyzing the impact of sales volume changes on a company's profitability and breakeven point, as it focuses on the costs that vary with sales volume. Gross margin, on the other hand, includes fixed costs and is not as effective in assessing how changes in sales volume affect a company's bottom line.
Work Step by Step
I agree with the statement. In CVP (Cost-Volume-Profit) analysis, contribution margin is a more useful concept than gross margin. Gross margin only considers the difference between sales revenue and the cost of goods sold (COGS), while contribution margin goes a step further by subtracting variable expenses from sales revenue. Contribution margin directly reflects the amount available to cover fixed costs and contribute to profit. This makes it a better tool for analyzing the impact of sales volume changes on a company's profitability and breakeven point, as it focuses on the costs that vary with sales volume. Gross margin, on the other hand, includes fixed costs and is not as effective in assessing how changes in sales volume affect a company's bottom line.
