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) $64,200 87,100 Home Box Office (pay television) Warner Bros. (films, television, and videos) 76,600 Assume that the variable costs as a percent of sales for each segment are as follows: 34% Turner Home Box Office Warner Bros. 21% 33% a. Determine the contribution margin and contribution margin ratio for each segment from the information given. When required, round to the nearest whole millionth (for example, round 5,688.7 to 5,689). Round contribution margin ratio to whole percents for each segment from the information given. Turner Home Box Office Warner Bros. Revenues Variable costs Contribution margin Contribution margin ratio (as a percent) % % % b. Does your answer to (a) 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	$64,200	$87,100	$76,600
Variable cost	$21,828	$18,291	$25,278
Contribution margin	$42,372	$68,809	$51,322
Contribution margin ratio (as a percent)	66%	79%	67%

b. The highest contribution margin ratio of a segment should not be interpreted as being most profitable segment. If the volume of the business is not sufficient to exceed the breakeven point, then the segment would be unprofitable. In the final analysis, the fixed cost also should be considered in determining the overall profitability of the segment. The contribution margin ratio shows how sensitive the profit will be to changes in volume.