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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)	$61,000
Home Box Office (pay television)	40,200
Warner Bros. (films, television, and videos)	47,800

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

Turner	26%
Home Box Office	53%
Warner Bros.	48%

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	$fill in the blank 1		$fill in the blank 2		$fill in the blank 3
Variable costs	fill in the blank 4		fill in the blank 5		fill in the blank 6
Contribution margin	$fill in the blank 7		$fill in the blank 8		$fill in the blank 9
Contribution margin ratio (as a percent)	fill in the blank 10	%	fill in the blank 11	%	fill in the blank 12	%

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

leastmostmost

profitable segment. If the volume of business is not sufficient to exceed the break-even point, then the segments would be

somewhat profitableunprofitableunprofitable

. In the final analysis, the fixed costs also should be considered in determining the overall profitability of the segments. The

contribution margin ratiofixed costsvariable costscontribution margin ratio

shows how sensitive the profit will be to changes in volume.

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