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

==>> Segment margin is the amount of net profit or net loss generated by a portion of a business. It is useful to track segment margins (especially on a trend line) in order to learn which parts of a total business are performing better or worse than average. The analysis is also useful for determining where to invest additional funds in a business.

Segment margin is calculated from the revenues and expenses that are directly traceable to a segment.

==>> The contribution margin is the difference between sales revenue and variable expenses. The segment margin is the amount remaining after deducting traceable fixed expenses from the contribution margin. The contribution margin is useful as a planning tool for many decisions, including those in which fixed costs dont change. The segment margin is useful in assessing the overall profitability of a segment.

DIFFERENCE BETWEEN TRACEABLE AND COMMON FIXED COST :--

TRACEABLE FIXED COST:-

• A traceable fixed cost is a fixed cost that is incurred because of the existence of a segment. If the segment had never existed, the fixed cost would have not been incurred; and if the segment were eliminated, the fixed cost would disappear.

• EXAMPLE:- 1)-The salary of the Fritos product manager at Pepsi CO. is traceable fixed cost of the Fritos business segment of Pepsi Co.

2)-The liability insurance at Disney World is a traceable fixed cost of the Disney World business segment of the Disney Corporation.

COMMON FIXED COST :--

• A common fixed cost is a fixed common cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment. Even if a segment were entirely eliminated, there would be no change in true common fixed cost.

• EXAMPLE:-1) The salary of general manager who controls all the segments. The salary of CEO at general motors is also an example of common fixed cost. No single segment can be regarded as the sole reason of this cost.

2)-The salary of receptionist at an office shared by a number of doctors is a common fixed cost of the doctors. The cost is traceable to the office, but not to any one of the doctors individually.

==>> segmentation can assist companies in several areas:

• Analysis of the market—better understanding of the total marketplace, including how and why customers buy.

• Selection of key markets—rational choice of market segments that best fit the company’s capabilities.

• Management of marketing—the development of strategies, plans, and programs to profitably meet the needs of different market segments and to give the company a distinct competitive advantage.

COMMON FIXED COST OF THE COMPANY :- Fixed costs are those cash expenses that must be paid whether the business produces or sells a single product. Common examples include rent, insurance, salaries and interest.It doesn’t matter whether you produce or sell one widget or several thousand, the rent must still be paid.

A common fixed costis a fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment.

-->>The traceable fixed costs of one segment may be a common fixed cost of lower-level segments. For example, the landing fee paid to land an airplane at an airport is traceable to a particular flight, but it is not traceable to first-class, business-class, and economy-class passenger.