Question

What is segment margin?

How is it different from contribution margin?

What is the difference between traceable fixed costs and common fixed costs?

Choose a company. Break that company into two separate segments. What are three common fixed costs of the company? What are three traceable fixed costs to each segment?

Answer 1

1) Segment margin is a measure of profitability or loss generated by a specific product line of a business, or a specific geographic location. It is computed as contribution margin minus traceable fixed expenses.

2) Contribution margin is computed as revenue from sales minus variable expenses. It acts as a useful tool in planning for several decisions, including those in which fixed costs remains unchanged. The segment margin assists in assessment of the overall profitability of a unit segment.

3) A traceable fixed cost refers to a fixed cost that is occurred due to the existence of a specific segment in the business. It would not exist if that specific segment ceased to exist. On contrary a common fixed cost refers to a fixed common cost that occurs for supporting the business operations of more than one segment, however cannot be traced in part or whole to any part to any one segment. It would exist even if the segments are entirely eliminated.

4) Example: In a grocery store:

Common fixed costs

-- CEO's salary

-- Maintenance cost for the building occupied by corporate office

-- Heating cost is a common fixed cost of the many departments – groceries, produce, and bakery

Common traceable fixed cost:

-- Salary of research-and-development division manager in research-and-development division

-- Salary of receptionist at an office shared by a number of divisions

-- Advertisement cost on different divisions

-- Depreciation of special equipment

-- Rent for space Division A occupies