Answer :
To determine the segment margin, a business evaluates the financial performance of a separate segment of the organization. The segment margin helps assess the profitability of different parts of the business and is instrumental for managerial decisions.
The segment margin is calculated with the formula:
[tex]\text{Segment Margin} = \text{Revenue} - \text{Variable Costs} - \text{Direct Fixed Costs}[/tex]
Let's examine each of these components:
Revenue: This is the total income generated by the segment from sales of goods or services.
Variable Costs: These are expenses that vary directly with the level of production or sales volume, such as raw materials and direct labor.
Direct Fixed Costs: These are fixed costs that can be directly attributed to the segment, like segment-specific managerial salaries or equipment.
Using this calculation, the correct multiple-choice answer is Option 2: Revenue minus variable cost minus direct fixed cost.
Understanding segment margin allows businesses to analyze profitability at a more detailed level, helping to make informed decisions about resource allocation, cost control, and strategic planning.
