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Segment Margin Formula:
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Segment Margin (SM) is a financial metric that measures the profitability of a specific business segment by subtracting variable costs (VC) from segment revenue (SR). It helps evaluate the contribution of individual segments to overall company profitability.
The calculator uses the Segment Margin formula:
Where:
Explanation: The formula calculates the amount of revenue remaining after covering variable costs associated with a specific business segment.
Details: Segment margin analysis is crucial for strategic decision-making, resource allocation, and identifying profitable vs. unprofitable business segments. It helps management understand which segments contribute most to overall profitability.
Tips: Enter segment revenue and variable costs in dollars. Both values must be non-negative numbers. The calculator will compute the segment margin by subtracting variable costs from segment revenue.
Q1: What's the difference between segment margin and net profit?
A: Segment margin focuses only on revenue and variable costs of a specific segment, while net profit considers all revenues and expenses including fixed costs and overhead.
Q2: How is segment margin used in decision-making?
A: It helps determine whether to continue, expand, or discontinue a business segment based on its profitability contribution.
Q3: What are considered variable costs?
A: Variable costs change proportionally with production/sales volume, such as raw materials, direct labor, and sales commissions.
Q4: Can segment margin be negative?
A: Yes, if variable costs exceed segment revenue, indicating the segment is not covering its direct costs.
Q5: How often should segment margin be calculated?
A: Typically calculated monthly or quarterly as part of regular financial reporting and performance analysis.