The operating revenues of the three largest business segments for Time Warner, I

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) $10,596 5,615 12,993 Turner (cable networks and digital media) Home Box Office (pay television) Warner Bros. (films, television, and videos) Assume that the variable costs as a percent of sales for each segment are as follows Turner Home Box Office Warner Bros a. Determine the contribution margin and contribution margin ratio. Enter amounts in millions. When required, round to the nearest whole millionth (for example, round 5,688.7 to 5,689). Round contribution margin ratio to the nearest whole percent for each segment from the information given. Enter all amounts as positive numbers. 40% 35% 25% 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 exceed the break-even point, then the segments would be profitability of the segments. The profitable segment. If the volume of business is not sufficient to In the final analysis, the fixed costs also should be considered in determining the overall shows how sensitive the profit will be to changes in volume

Explanation / Answer

a)

(Amount in millions $)

Turner

Home Box Office

Warner Bros.

Revenues

10596

5615

12993

Variable costs

10596*40% = 4238.4

5615*35% = 1965.25

12993*25% = 3248.25

Contribution margin

10596 - 4238.4 = 6357.6

5615 - 1965.25 = 3649.75

12993 – 3248.25 = 9744.75

Contribution margin ratio (as a percent)

(6357.6/10596) *100 = 60%

(3649.75/5615)*100 = 65%

(9744.75/12993)*100 = 75%

b)

The higher contribution margin ratio of a segment should not be interpreted as being the most Profitable segment. If the volume of business is not sufficient to exceed the break-even point,then the segments would be non profitable. In the final analysis, the fixed cost also should be considered in determining the overall profitability of the segments. The Cost volume profit analysis shows how sensitive the profit will be changes in volume.

(Amount in millions $)

Turner

Home Box Office

Warner Bros.

Revenues

10596

5615

12993

Variable costs

10596*40% = 4238.4

5615*35% = 1965.25

12993*25% = 3248.25

Contribution margin

10596 - 4238.4 = 6357.6

5615 - 1965.25 = 3649.75

12993 – 3248.25 = 9744.75

Contribution margin ratio (as a percent)

(6357.6/10596) *100 = 60%

(3649.75/5615)*100 = 65%

(9744.75/12993)*100 = 75%

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