Segment Contribution Margin Analysis The operating revenues of the three largest
ID: 2510810 • Letter: S
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.
Assume that the variable costs as a percent of sales for each segment are as follows:
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.
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.
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
Explanation / Answer
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.