Segment Contribution Margin Analysis

Amazon.com, Inc. (AMZN) organizes its operations into three segments: North America, International, and Amazon Web Services (AWS). The North America and International segments primarily report amounts earned from online consumer retail sales. The AWS segment offers a broad set of technology services, including computing, storage, database, analytics, and other cloud-based services. For a recent year, Amazon reported the following segment results (in millions):

Line Item Description	Segment North America	Segment International	Segment AWS	Total
Sales	$236,282	$104,412	$45,370	$386,064
Operating expenses	(227,631)	(103,695)	(31,839)	(363,165)
Operating income	$8,651	$717	$13,531	$22,899

Assume the following percentages of total operating expenses for each segment are variable:

Segment	Percentage of Variable Operating Expenses
North American	85%
International	80%
AWS	75%

Question Content Area

a. Prepare a variable costing income statement for Amazon.com by segment. Round all amounts to the nearest million.

Amazon.com, Inc. Variable Costing Income Statement (in millions)

Line Item Description	North America	International	AWS	Total
Contribution marginManufacturing marginSalesVariable cost of goods soldVariable commission expenseSales	$Sales	$Sales	$Sales	$Sales
Contribution marginManufacturing marginSalesVariable cost of goods soldVariable operating expensesVariable operating expenses	Variable operating expenses	Variable operating expenses	Variable operating expenses	Variable operating expenses
Contribution marginManufacturing marginFixed operating expensesSalesVariable commission expenseContribution margin	$Contribution margin	$Contribution margin	$Contribution margin	$Contribution margin
Contribution marginManufacturing marginSalesFixed operating expensesVariable commission expenseFixed operating expenses	Fixed operating expenses	Fixed operating expenses	Fixed operating expenses	Fixed operating expenses
Contribution marginManufacturing marginOperating incomeOperating lossVariable cost of goods soldOperating income	$Operating income	$Operating income	$Operating income	$Operating income

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Partially correct

Question Content Area

b. Compute the contribution margin ratio for each segment. Round ratios to the nearest tenth of a percent.

Segment	Contribution Margin Ratio
North America	fill in the blank 1 of 3%
International	fill in the blank 2 of 3%
AWS	fill in the blank 3 of 3%

c. Based on your answers to (a) and (b), interpret the segment performance. The North America segments contribution margin ratio is slightly fill in the blank 1 of 6

lowerhigherlower

than Internationals contribution margin ratio. In contrast, AWS has a contribution margin ratio is fill in the blank 2 of 6

morelessmore

than twice that of the North America and International segments. These differences reflect the underlying operations of each segment. The North America and International segments are based primarily upon consumer retail sales, which is fill in the blank 3 of 6

highlynot highlyhighly

competitive with fill in the blank 4 of 6

lowhighlow

operating margins. In contrast, AWS focuses on a broad set of technology services, which allows for fill in the blank 5 of 6

higherlowerhigher

operating margins. In addition, Amazon.com was one of the first companies to focus on developing cloud-based technology services. However, Amazon.com is facing fill in the blank 6 of 6

increasingdecreasingincreasing

competition in its AWS cloud-based services from companies such as Microsoft (MSFT).