Chapter 6

Dollar sales for company to break even

(Traceable FE+ common FE)/ Overall CM ratio.

Traceable fixed cost

A fixed cost that is incurred because of the existence of a certain business segment and that would be eliminated if the segment were eliminated. (Ex: salary of the supervisor, depreciation in the dept.)

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 business segment.

Segment

Any part of activity of an organization in which managers seek cost, revenue, or profit data.

Explain how the contribution margin differs from the segment margin

Contribution margin is useful as a planning tool, especially when fixed costs dont change. Segment margin is useful for assessing the overall profitability of a segment.

What costs are assigned to a segment under the contribution approach?

Costs assigned to a segment if the costs are traceable. COMMON COSTS ARE NOT ALLOCATED IN THIS APPROACH.

How is it possible for a fixed cost that is traceable to a segment to become a common fixed cost if the segment is divided into further segments?

Fixed costs traceable to a segment can become common as the segment is divided into smaller units.

Why aren't common fixed costs allocated to segments under the contribution approach?

It would overstate their costs, and margins would be understated. This makes it seem like some segments are unprofitable.

What is a segment of an organization? Give several examples of segments.

Manager seeks cost, revenue or profit data. Ex: departments, operations, sales territories, divisions, product lines.

Should a company allocate its common fixed costs to business segments when computing the break-even point for those segments? Why?

No, a company shouldn't allocate its common fixed costs to business segments. These costs aren't traceable to individual segments, and wont be affected by segment-level decisions.

Segment margin

Segment CM-traceable FC. Represents the margin available after a segment has covered all of its own traceable costs.

Dollar sales for segment to break even

Segment traceable FE/segment CM ratio.