Exercises: Segment Contribution Margin Analysis (Pgs. 215 & 216) The operating r

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Exercises: Segment Contribution Margin Analysis (Pgs. 215 & 216)

The operating revenues of the three largest business segments for Time Warner, Inc., for a recent year are shown below. Each segment includes a number of businesses, examples of which are indicated in parentheses.

Time Warner, Inc.

Segment Revenues

(in millions)

Filmed Entertainment (Warner Bros.)

$11,784

Networks (CNN, HBO, WB)

13,562

Publishing (Time, People, Sports Illustrated)

6,328

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

Filmed Entertainment                    34%

Networks                                      32%

Publishing                                     70%

Determine the contribution margin (round to whole millions) and contribution margin ratio (round to whole percents) for each segment from the above information.

Why is the contribution margin ratio for the Publishing segment smaller than for the other segments?

Does your answer to (b) mean that the other segments are more profitable businesses than the Publishing segment?

Filmed Entertainment (Warner Bros.)

$11,784

Networks (CNN, HBO, WB)

13,562

Publishing (Time, People, Sports Illustrated)

6,328

Explanation / Answer

Step 1: Given data

Segment

Revenue ($) in millions

Variable Cost (%)

Filmed Entertainment (Warner Bros.)

11,784

34%

Networks (CNN, HBO, WB)

13,562

32%

Publishing (Time, People, Sports Illustrated)

6,328

70%

Step 2 – Variable Cost Calculation

Based on the given data, the variable cost is given as a %. So, the monetary value is obtained by the formula

Revenue of the Segment * Variable Cost %

For Filmed Entertainment (Warner Bros.), the Variable Cost (in millions) = 11,784 * 34% = $4006.56 million

For Networks (CNN, HBO, WB), the Variable Cost (in millions) =13,562*32% =$4339.84 million

For Publishing (Time, People, Sports Illustrated), the Variable Cost (in millions) = 6,328*70% = $4429.60 million

a.

Step 3 – Contribution Margin Calculation

The formula is

Contribution Margin c = Revenue – Variable Cost

For Filmed Entertainment (Warner Bros.), the contribution margin (in millions) = $11,784 -$4006.56 =$7777 million

For Networks (CNN, HBO, WB), the contribution margin =$13,562-4339.84=$9222 million

For Publishing (Time, People, Sports Illustrated), the contribution margin = $6,328-$4429.60=$1898 million

Step 4: Contribution Margin Ratio Calculation

The formula for contribution margin ratio is

Contribution Margin Ratio % = (Contribution Margin/ Revenue)*100

For Filmed Entertainment (Warner Bros.), the contribution margin ratio % = ($7777/$11,784)*100=0.659*100=65.9 ~66%

For Networks (CNN, HBO, WB), the contribution margin ratio % = ($9222/$13,562)*100 = 0.679*100=67.9% ~68%

For Publishing (Time, People, Sports Illustrated), the contribution margin ratio = ($1898/$6,328)*100 =0.299*100=29.9% ~30%

Step 5: Summary of Calculated Values

The calculated values are summarised as follows.

Segment

Revenue ($ in millions)

Variable Cost (%)

Variable Cost ($ in millions)

Contribution Margin ($ in millions)

Contribution Margin Ration %

Filmed Entertainment (Warner Bros.)

11,784

34%

4006.56

7777

66%

Networks (CNN, HBO, WB)

13,562

32%

4339.84

9222

68%

Publishing (Time, People, Sports Illustrated)

6,328

70%

4429.6

1898

30%

b.

For the Publishing segment the revenue is less when compared to other segments i.e.6328 which is less that $11784 and $13562. The variable cost for this division is higher when compared to other divisions. i.e.70%. This reduces the contribution margin of the publishing segment.

c.

Yes, the other segments are more profitable. This is evident from their higher revenues when compared to the publishing segment. As well as, the variable cost for other segments is low when compared to the publishing segment. This indicates that the expenses are less for the other segments when compared to their revenue which increases their profitability.

Segment

Revenue ($) in millions

Variable Cost (%)

Filmed Entertainment (Warner Bros.)

11,784

34%

Networks (CNN, HBO, WB)

13,562

32%

Publishing (Time, People, Sports Illustrated)

6,328

70%

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