Question

Segment Contribution Margin Analysis

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)	$74,200
Home Box Office (pay television)	53,400
Warner Bros. (films, television, and videos)	45,000

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

Turner	19%
Home Box Office	50%
Warner Bros.	27%

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

a
	Turner	Home Box Office	Warner Bros.
Revenues	74200	53400	45000
Variable costs	14098	26700	12150
Contribution margin	60102	26700	32850
Contribution margin ratio (as a percent)	81%	50%	73%
b
The higher contribution margin ratio of a segment should not be interpreted as being the most profitable. If the volume of business is not sufficient to exceed the break-even point, then the segments would be unprofitable . In the final analysis, the fixed costs also should be considered in determining the overall profitability of the segments. The contribution margin ratio shows how sensitive the profit will be to changes in volume.