Segment margin is the operating income generated by a profit or investment center before subtracting common fixed costs that have been allocated to the center.
Simply put, segment margin calculates the profit of an individual SKU (product line) as opposed to calculating the profitability of the whole company.
Companies with a lot of different product lines and variations e.g. an FMCG company like Unilever can have different kinds of soaps, at different prices, styles, etc.
Calculating the segment margin of each variation will help determine the strengths and weaknesses of each product line.
With this information, the company can make better financial decisions, investments, and forecasting details.
Calculating Segment Margin:
Revenue Generated by the Product Segment - Variable expenses - Avoidable costs
Please note, that overall expenses such as overheads of the company will not be included in this.
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