Segment Margin

Segment Margin

See Also:
Segment Margin Example
Segmenting Customers for Profit
Net Profit Margin Analysis
Operating Profit Margin Ratio
Margin vs Markup
Profitability Index Method

Segment Margin Definition

Segment margin is a measure of profitability that applies to individual product lines. It is calculated as segment revenues minus variable costs minus avoidable fixed costs. It is also used to measure the profitability of a segment or product line when you make the decision of whether to continue or discontinue that segment or product line.

Segment Margin Calculation

Use the following formula to calculate segment margin:

SM = Segment Revenues – Variable Costs – Avoidable Fixed Costs

Segment Margin and Decision-Making

Segment margin separates relevant costs from irrelevant costs when analyzing a product line. For instance, if management is deciding whether to continue or discontinue a product line, the appropriate calculation for measuring the relevant revenues and relevant expenses for the decision would be to use this type of margin.
The difference between segment margin and other measures of profitability, such as contribution margin, is that it divides fixed costs into three categories. Consider one of the categories of fixed costs relevant when making decisions about the segment in question; the other two categories of fixed costs are irrelevant.

Segment Margin and Fixed Costs

The three categories include the following: avoidable fixed costs, unavoidable fixed costs, and common expenses. Avoidable fixed costs are relevant in the decision-making process of whether to continue or discontinue a product line. Whereas, unavoidable fixed costs and common expenses are irrelevant for decisions regarding a particular product line.
Avoidable fixed costs are those fixed costs that would not incur if you eliminated the segment or product line. Unavoidable fixed costs are fixed costs necessary for the continuation of the segment or product line. But those fixed costs would still incur if you discontinued that segment or product line. Eliminating the segment in question would merely cause the allocation of these unavoidable fixed costs to another segment. Refer to common expenses as expenses incurred by the company as a whole that are allocated to various segments or product lines.
If you want to increase the value of your organization, then click here to download the Know Your Economics Worksheet.
segment margin
[box]Strategic CFO Lab Member Extra
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
segment margin

Source:

Barfield, Jesse T., Michael R. Kinney, Cecily A. Raiborn. “Cost Accounting Traditions and Innovations,” West Publishing Company, St. Paul, MN, 1994.

Related Blogs
Does your Accounting Department Produce Net Income?

Coaching the Entrepreneur: Learn how to know what you don’t know. How much should I spend on accounting for my company?     I have been in the accounting profession for 32 years, and for the last 6 years, I’ve owned my own consulting firm to assist companies with accounting challenges. There is one common theme that I

Read More »
Near Sourcing vs. Outsourcing: The Key to Cost-Effective Accounting Solutions

In this insightful interview, Dan sheds light on the critical role of accounting in business growth and success. Uncover the common pitfalls business owners face when overlooking accounting and how it can hinder access to loans and financial opportunities. Learn why good financial statements are vital for decision-making and attracting investors. With the NearSourcing model,

Read More »
Is Mexico the New China?

In the wake of the COVID-19 pandemic and escalating tensions with China, American companies are actively seeking alternatives to mitigate their supply chain risks and reduce dependence on Chinese manufacturing. Nearshoring, the process of relocating operations closer to home, has emerged as an explosive opportunity for American and Mexican companies to collaborate like never before.

Read More »
WIKI CFO® - Browse hundreds of articles
Skip to content