What is controllable margin?
a. Contribution margin less controllable fixed costs
b. Sales minus variable costs
c. Sales minus contribution margin
d. Contribution margin less all fixed costs
The correct answer and explanation is :
Correct Answer:
a. Contribution margin less controllable fixed costs
Explanation:
Controllable margin is a key financial metric used to assess the profitability of a specific business unit, segment, or manager’s performance. It is calculated by taking the contribution margin (sales revenue minus variable costs) and subtracting the controllable fixed costs (fixed costs that a manager has direct control over).
Breaking Down the Components:
- Contribution Margin:
- It is calculated as Sales – Variable Costs.
- This measures how much revenue is available to cover fixed costs after accounting for variable costs.
- Controllable Fixed Costs:
- These are fixed costs that a manager can influence or control within a specific period, such as salaries of employees under their supervision, marketing expenses, and discretionary operational costs.
- Non-controllable fixed costs (e.g., corporate overhead, rent for a company-owned building) are excluded because the manager has no control over them.
- Controllable Margin Calculation:
- Controllable Margin = Contribution Margin – Controllable Fixed Costs
- This metric helps assess a manager’s effectiveness in controlling costs and generating profits.
Why Other Options Are Incorrect?
- b. Sales minus variable costs → This gives the contribution margin, not the controllable margin.
- c. Sales minus contribution margin → This would incorrectly imply only variable costs, which is not a measure of profitability.
- d. Contribution margin less all fixed costs → This would give net operating income, not controllable margin.
Thus, option (a) is the correct answer because controllable margin focuses on performance measurement by accounting for controllable fixed costs, distinguishing it from broader profitability measures.