Comparing contribution margin [CM] to gross margin [GM], which of the following is true?
A) If Cost of goods sold includes fixed costs, then CM will exceed GM.
B) If Cost of goods sold does not include any fixed costs, then CM will equal GM.
C) In the merchandising sector, CM and GM are equivalent terms.
D) If CM and GM remain constant from one period to the next, operating income has to remain constant as well.
E) CM is computed after all variable costs are deducted, but GM is computed by deducting only cost of goods sold from revenues.

Question

Quizplus · Accepted Answer

CM is calculated by deducting all variable costs (direct costs that vary with the level of production or sales) from revenues, while GM is only calculated by deducting cost of goods sold (the cost of the products sold) from revenues. Therefore, CM will always be lower than GM, and option E correctly states this difference. Options A and B are incorrect because they assume fixed costs are included or excluded from Cost of Goods Sold, which is not necessarily true. Option C is incorrect because while GM is a term used in the merchandising sector, it is not synonymous with CM. Option D is incorrect because operating income is affected by other factors, such as fixed costs, which are not taken into account in the calculation of CM and GM.

Comparing Contribution Margin [CM] to Gross Margin [GM], Which of the Following