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 evaluate the performance of a business segment or department. It helps managers assess how much profit is generated by a unit after deducting the variable costs and the fixed costs that can be controlled by that unit.
Breaking Down the Concept:
- Contribution Margin:
- The contribution margin is calculated as Sales – Variable Costs.
- It represents the amount of revenue available to cover fixed costs and generate profit.
- Controllable Fixed Costs:
- These are the fixed costs that managers have control over, such as salaries of department employees, marketing expenses, and utility costs for a specific division.
- These exclude fixed costs that are beyond the control of a specific manager, such as corporate-level overhead or long-term lease obligations.
- Formula for Controllable Margin:
- Controllable Margin = Contribution Margin – Controllable Fixed Costs
- It helps measure the profitability of a segment by considering only those costs that a manager can directly influence.
Why the Other Options Are Incorrect?
- b. Sales minus variable costs → This is the definition of Contribution Margin, not Controllable Margin.
- c. Sales minus contribution margin → This would give variable costs, not Controllable Margin.
- d. Contribution margin less all fixed costs → This would give Net Operating Income, not Controllable Margin, as it includes all fixed costs (both controllable and uncontrollable).
Conclusion:
Controllable margin is a valuable metric for managerial decision-making, helping businesses track performance at different levels and make strategic adjustments where needed.