ACCT 2122 Chapter 6
Dollar break-even for a company is calculated as:
(Traceable fixed expenses + Common fixed expenses) / Overall CM ratio
SPS Products has two divisions—Catalog Sales and Online Sales. For the last quarter the Catalog Sales segment margin was ($5,000). Online sales were $100,000. Online Sales contribution margin was $60,000, and its segment margin was $40,000. If Catalog Sales are discontinued, it is estimated that online sales will increase by 10%. Discontinuing Catalog Sales should increase company profits by:
$11,000 Increased online sales contribution margin ($100,000 * 10% * ($60,000 / $100,000)) is $6,000 + $5,000 saved from stopping catalog sales = $11,000.
Segment margin
A segment's contribution margin less its traceable fixed costs. > represents the margin available after a segment has covered all of its own traceable costs.
Example of how fixed costs that are traceable to one segment may be a common cost of another segment
United Airlines might want a segmented income statement that shows the segment margin for a particular flight broken down into first-class, business-class, and economy-class segment margins. The airline must pay a substantial landing fee at Charles DeGaulle airport in Paris. This fixed fee is a traceable cost of the flight, but it is a common cost of the first-class, business-class, and economy-class segments. Even if the first-class cabin is empty, the entire landing fee must be paid, so the landing fee is not a traceable cost of the first-class cabin. But on the other hand, paying the fee is necessary in order to have any first-class, business-class, or economy-class passengers. So the landing fee is a common cost of these three classes.
Fixed costs that are traceable to one segment may be ___
a common cost of another segment
The segment margin is the best gauge of
the long-run profitability of a segment because it includes only those costs that are caused by the segment
the sum of the segment break-even sales figures of $315,000 ($180,000 + $135,000) is less than the company wide break-even point of $475,000. This occurs because ___
the segment break-even calculations do not include the company's common fixed expenses
Examples of traceable fixed costs include the following:
> The salary of the Fritos product manager at PepsiCo is a traceable fixed cost of the Fritos business segment of PepsiCo. > The maintenance cost for the building in which Boeing 747s are assembled is a traceable fixed cost of the 747 business segment of Boeing. > The liability insurance at Disney World is a traceable fixed cost of the Disney World business segment of The Walt Disney Corporation.
Traceable fixed cost
A fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated.
Segment contribution margin
segment revenue minus the variable expenses for the segment
the contribution margin is most useful in decisions involving ___
short-run changes in sales volume, such as pricing special orders that involve temporary use of existing capacity
If a segment can't cover its own costs, then that segment probably should be ___
dropped (unless it has important side effects on other segments). > Notice, common fixed costs are not allocated to segments
Let's assume that ProphetMax wants to know the profit impact of discontinuing the sale of computer games through its Retail Stores sales channel. The company believes that Online Sales of its computer games will increase 10% if it discontinues the Retail Stores sales channel. It also believes that the Business Products Division and Clip Art product line will be unaffected by this decision. How would you compute the profit impact of this decision?
1.) calculate the profit impact of discontinuing the Retail Stores sales channel. 1.a) If this sales channel is eliminated, we assume its sales, variable expenses, and traceable fixed expenses would all go away. The quickest way to summarize these financial impacts is to focus on the Retail Stores' segment margin. 1.b) if the Retail Stores sales channel discontinued, then its negative segment margin of $3,000 would also be avoided. This would increase ProphetMax's net operating income by $3,000. 2.) calculate the profit impact of increasing Online Sales of computer games by 10%. 2.a) To perform this calculation, we assume that the Online Sales total traceable fixed expenses ($15,000) remain constant and its contribution margin ratio remains constant at 63% (= $63,000 ÷ $100,000). 2.b) If Online Sales increase $10,000 (= $100,000 × 10%) then the Online Sales segment's contribution margin will increase by $6,300 (= $10,000 × 63%)
Common fixed cost
A fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segments.
NATHAN FOR THE LOVE OF ALL YOU HAVE TO ___
READ OVER THE HOMEWORK AND QUIZZES TO MAKE SURE YOU UNDERSTAND THEM PLEASE JUST DO THIS, NATHAN
From a decision-making point of view, the segment margin is most useful in ___
major decisions that affect capacity such as dropping a segment
