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Controlling Cost, Profit, and Investment Centers Chapter 19 961
International Manufacturing Corporation (IMC)
Segment Margin Statement
September 2009
(in thousands of dollars)
Segments
Segments
Edison U.S. Far East Europe Far East Japan Korea
Automobile Operations Operations Operations Operations Operations Operations
$10,000 $ 5,000 $ 2,000 $ 3,000 $ 2,000 $ 1,200 $ 800
$ (6,000) $(2,900) $(1,100) $(2,000) $ (1,100) $ (700) $ (400)
(1,300) (700) (300) (300) (300) (170) (130)
$ (7,300) $(3,600) $(1,400) $(2,300) $ (1,400) $ (870) $ (530)
$ 2,700 $ 1,400 $ 600 $ 700 $ 600 $ 330 $ 270
(500) (250) (100) (150) (70) (60) (10)
$ 2,200 $ 1,150 $ 500 $ 550 $ 530 $ 270 $ 260
(200) (30)
$ 2,000 $ 500
20.0% 23.0% 25.0% 18.3% 25.0% 22.5% 32.5%
segment margins
The difference between
segment revenue and
direct segment costs;
a measure of the segment’s
contribution to
cover indirect fixed costs
and provide profits. In
effect, segment margins
are the operating
profit created by the
segment.
segment-margin ratios
The segment margin divided
by the segment’s
net sales revenue;
a measure of the efficiency
of the segment’s
operating performance
and, therefore, of its
profitability.
Interpreting Profit Center Performance Results
Given that the segment margin statement in Exhibit 4 was prepared in light of the principles
of controllable and direct costs, how does management use the information it
contains First, the operating profit figure provides management with concrete information
for evaluating the performance of the company as a whole. Second, the
segment margins enable management to analyze company results by evaluating
the performance of each segment.
We are now ready to examine the operations of IMC segments in detail. In
absolute terms, Edison Automobile has a larger segment margin than Acme
Computer ($2 million versus $1.8 million). U.S. operations have earned
more than the Far East and Europe operations; the Japan operations have a
larger segment margin than do the Korea operations. Absolute profits, however,
often favor those segments with a larger asset base—with larger manufacturing
facilities, for example. A larger facility with more manufacturing capacity
should naturally have higher production and higher sales and, hence, a
higher segment margin. A more equitable way to assess performance is to
compare segment-margin ratios (segment margin divided by net sales), because
ratios focus on relationships rather than absolute dollar amounts. For example,
though the segment margin of Europe operations is larger than that
of Far East operations, the latter has a higher segment-margin ratio (25% versus
18.3%).
In using segment margin statements to evaluate profit centers, it is important
to review performance over several periods or months. A single period
or month may not be typical of overall performance. In our example, September
might have been an unusually bad profitability month for the Korea unit of Far
East operations because of a slump in the Korean economy or a labor strike.
In fact, the performance can be evaluated only by looking at cost and profit
trends over several periods, and by comparing the results of these units with
those of other similar units.