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)	$64,300
Home Box Office (pay television)	46,200
Warner Bros. (films, television, and videos)	64,000

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

Turner	44%
Home Box Office	37%
Warner Bros.	44%

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

Contribution margin = sales - variable costs

Contribution margin ratio = contribution margin/sales

	Turner	home box Office	Warner
Revenues	64,300	46,200	64,000
Variable costs	28,292	17,094	28,160
Contribution margin	36,008	29,106	35,840
Contribution margin ratio	56%	63%	56%

Then the segments would be loss making

Degree of operating leverage shows sensitivity