Segment Margin

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Segment margin is the profit a business segment, such as a product line, region or division, contributes after deducting its variable costs and the fixed costs directly traceable to it, but before shared company-wide costs.

Segment margin shows how much each part of a business contributes towards covering the company's common costs, such as head office and group IT, and towards overall profit.

It is calculated by taking the segment's revenue, subtracting its variable costs to get the contribution margin, and then subtracting fixed costs that exist only because of that segment, such as its dedicated staff, equipment and marketing.

For example, a product line has revenue of 500,000, variable costs of 300,000 and traceable fixed costs of 120,000. Its segment margin is 80,000.

Segment margin is useful for decisions about whether to keep or drop a segment. If a segment has a positive segment margin, closing it would usually reduce total profit, even if it looks unprofitable after shared costs are allocated to it, because those shared costs would remain. It is a management accounting measure and differs from the segment results reported in published financial statements.

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