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) $95,600 Home Box Office (pay television) 33,700 Warner Bros. (films, television, and videos) 80,500 Assume that the variable costs as a percent of sales for each segment are as follows: Turner 38% Home Box Office 35% Warner Bros. 50% 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. 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 most profitable segment. 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.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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) | $95,600 | |
| Home Box Office (pay television) | 33,700 | |
| Warner Bros. (films, television, and videos) | 80,500 |
Assume that the variable costs as a percent of sales for each segment are as follows:
| Turner | 38% | |
| Home Box Office | 35% | |
| Warner Bros. | 50% |
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.
| 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 most profitable segment. 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.
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