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) $75,100 Home Box Office (pay television) 43,200 Warner Bros. (films, television, and videos) 44,500 Assume that the variable costs as a percent of sales for each segment are as follows: Turner 27% Home Box Office 16% Warner Bros. 25% 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

Answer 1

Answer:

Time Warner, Inc.

a) Contribution Margin and Contribution Margin Ratio for each segment:

                                             Turner      Home Box Office       Warner Bros.

Revenues                            $75,100           $43,200                   $44,500

Variable costs                       20,277                6,912                        11,125 Contribution margin          $54,823           $36,288                    $33,375

Contribution margin ratio

   (as a percent of Revenue)    73%                  84%                          75%

b) The answer in (a) does not mean that the two other segments are more profitable than Turner.  The Contribution Margin Ratio is not enough to decide the profitability of each segment.  It only shows the percentage of revenue that is left after deducting the variable costs.  To determine profitability, fixed costs will be deducted from the contribution margin.  Fixed costs refer to the periodic costs associated with running the different segments.

Explanation:

Segment Contribution Margin Analysis helps management to review the contributions made by each segment to the entity.  It shows the difference between segmental revenues and segmental variable costs.