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) $77,100 Home Box Office (pay television) 85,500 Warner Bros. (films, television, and videos) 64,700 Assume that the variable costs as a percent of sales for each segment are as follows: Turner 37% Home Box Office 16% Warner Bros. 35% 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

1
	Turner	Home Box Office	Warner Bros.
Revenues	77100	85500	64700
Variable costs	28527	13680	22645
Contribution margin	48573	71820	42055
Contribution margin ratio (as a percent)	63%	84%	65%
2
The higher contribution margin ratio of a segment should not be interpreted as being the more profitable segment.
If the volume of business is not sufficient to exceed the break-even point, then the segments would be not profitable
In the final analysis, the fixed costs also should be considered in determining the overall profitability of the segments.
The degree of Operating Leverage shows how sensitive the profit will be to changes in volume