In practice, many organizations measure the relative profitability of their segments by dividing the segments’ margins by their revenues. The segment margin for this purpose is the segment’s revenue less its fully allocated costs—including allocations of fixed common costs. For example, a hospital might compute the relative profitability of its major segments as follows:

The hospital’s net operating income for this period was $1,240,000.

Required:

1.     Evaluate the use of the margin, as defined above, in the numerator of the profitability measure.

2. Evaluate the use of revenue in the denominator of the profitability measure.

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St. Ignatius Hospital Profitability Report (in thousands of dollars) Emergency Surgery Acute Care Total Room $10,630 $21,470 S50,940 Revenue S18,840 21,090 Fully allocated cost 10,060 18,550 49,700 $ 570 S 1,240 $ 290 Margin 380 2.4% Profitability (Margin + Revenue) 5.4% 1.8% 1.5%