How to Calculate Segment Margins
Many businesses base their operations on the provision of more than one product or service and are faced with the need to analyze the profitability of individual segments. Business segments can be identified using specific or broad criteria depending on the analytical needs of a company. Some firms will only segment their operations into product or service types, others might segment them according to the industry, yet others might list each product or service individually to carry out an analysis of segment margins. Segment margins can be calculated by manipulating data available to the companies through notes to the financial statements.
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Instructions
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1
List the individual revenue from each segment as reported in the financial statements or as maintained in the available records.
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2
Estimate the unit cost of raw material for a certain product or service by dividing the costs of goods sold for a particular segment by the total number of units produced.
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Subtract the segments' revenues from the segment cost of goods sold to obtain the line item called contribution margin.
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4
Identify the fixed expenses that are traceable to particular segments. For example, the rent paid for office space occupied by the production facilities for a certain product or the fixed insurance fees paid for particular segments.
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Subtract traceable fixed expenses from the contribution margin in order to obtain the divisional segment margin income.
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Estimate the common fixed expenses by subtracting the total fixed expenses from the total traceable fixed expenses.
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Divide the common fixed expenses between all the segments based on self-determined criteria such as according to the proportion of revenue contributed by each segment.
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Subtract the common fixed expenses attributed to each segment from the divisional segment margin income to obtain the segment margin income.
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Divide the segment margin income from the individual segment margins and multiply by one hundred to obtain the segment margin in percentage terms.
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Tips & Warnings
Classify the segments properly according to what is intended to be achieved through an analysis of the segment margins.
Segment margins are estimated based on the assumption that a majority of the costs are identifiable to a particular segment. If most expenses are attributed arbitrarily the results obtained will be less accurate and less meaningful for purposes of analysis.
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