Question

The operating revenues of the three largest business segments for Time Warner, Inc., for a recent year follow. Each segment includes a number of businesses, examples of which are indicated in parentheses.

Time Warner, Inc. Segment Revenues (in millions)
Turner (cable networks and digital media)	$93,600
Home Box Office (pay television)	95,100
Warner Bros. (films, television, and videos)	81,700

Assume that the variable costs as a percent of sales for each segment are as follows:

Turner	23%
Home Box Office	18%
Warner Bros.	39%

a Determine the contribution margin and contribution margin ratio for each segment from the information given. Round contribution margin ratio to whole percents for each segment from the information given. Enter all amounts as positive numbers.

	Turner		Home Box Office		Warner Bros.
Revenues	$		$		$
Variable costs
Contribution margin	$		$		$
Contribution margin ratio (as a percent)		%		%		%

b. Does your answer to (b) mean that the other segments are more profitable businesses?

The higher contribution margin ratio of a segment should not be interpreted as being the profitable segment. If the volume of business is not sufficient to exceed the break-even point, then the segments would be . In the final analysis, the fixed costs also should be considered in determining the overall profitability of the segments. The shows how sensitive the profit will be to changes in volume.

Answer 1

Answer: The two things we need to calculate in the given problem are 1. Contribution margin and 2. Contribution margin ratio. We are going to calculate them by using the below formulaes.

Contribution margin = Sales revenue - Variable costs

Contribution margin ratio = (Contribution margin / Sales) * 100 {in words, Contribution divided by Sales and multiplied by 100}

This can directly derived by taking sales as 100% and substracting Variable costs % on Sales from it.

a)

($ in millions)

Particulars	Turner	Home Box Office	Warner Bros.
Revenues (given)	93,600	95,100	81,700
Variable costs in % of revenues(given)	23%	18%	39%
Variable costs in $ (revenue * Variable cost %)	21,528	17,118	31,863
Contribution margin in $	72,072	77,982	49,837
Contribution margin ratio %	77%	82%	61%

b) The above table doesnot imply anything on the profitability of a segment. The higher contribution margin may be due to one of these things, i.e., the segment's sales were relatively high or it's variable costs are low compared to other segments. The profitability of a segment depends on the fixed costs it incurs as Profit = (Contribution margin - Fixed costs). If a segment is incurring high fixed cost, it's profit will be low even though it's contibution margin ratio is high.