A segment margin is a key metric used in management accounting to assess the profitability of a specific business unit or segment. It represents the amount remaining after deducting direct fixed expenses from the contribution margin of that segment.
The contribution margin is calculated by taking total sales revenue and subtracting variable costs, which means it shows how much revenue after variable costs contributes to covering fixed costs and generating profit. After determining the contribution margin, the next step is to evaluate how much of that contribution is actually attributable to the segment's ability to cover its own fixed costs.
Direct fixed expenses are those costs that can be specifically traced to a segment and will not be incurred if that segment is eliminated. By subtracting only these direct fixed expenses from the contribution margin, you arrive at the segment margin, which is a more precise measure of a segment's performance.
This approach allows management to understand how well each segment is performing independently, providing valuable insights for decision-making, such as whether to expand, reduce, or eliminate a segment.