Is it possible to model the contribution of a specific product to net income?

[zttun86]

Hi,
Was just playing around with modeling. Say a company only releases segmented income statements, but does not mention the specific revenues / op income it generates from a new product, is it still possible to model that item’s contribution to the bottom line? For example:
Company XYZ has
a film segment: 30 percent op margin
a game segment: 40 percent op margin
a license segment: 25 percent op margin
effective tax rate: 30%
XYZ releases a new movie that grosses $1 billion in the global BO. Is it possible to get a rough gauge of how much this movie will contribute to the bottom line? Would it go something like this:
Movie generates $1b, after splitting sales with theaters, it takes in $500 million. Take this $500 million and subtract cost to make + market the movie..say $100 million (which includes interest and depreciation expense). Then multiply it by XYZ’s effective tax rate of .30 (30%).
Leaving with a rough estimate of $280 million or so going to NI from the $1b in revenue.
Or is there a better way? Thanks!

 

[picton]

There is nothing theoretically wrong with this approach but in practice be mindful that every unbacked assumption you make on the way reduces the quality of the final estimate substantially. In this example you assumed the company will receive 50% of the global box office receipts and guessed the negative cost and P&A spend at $100m. Unless these assumptions are very well grounded, the analytical use of your estimate will be limited.
In many cases, particularly in cases of companies with many business lines, it does not make sense to attempt to translate the effects of one product to net income, since taxes and interest are not easily attributable to specific products. It’s more common to end the analysis at the EBITDA or EBIT level.

 

[Analti_Calte_Equity]

This stuff isn’t that hard when you see it on paper or in excel.
Also, the film industry is an odd one to look at to examine profits. Its better to look at something with widgets if you really want to learn the cogs of the business.

 

[zttun86]

Thank you for the reply. I was thinking along these lines too. You also bring up a good point about taxes- that they are difficult to apply to specific items. I am assuming it is incredibly difficult otherwise impossible to model taxes for each product/revenue generating item specifically, and much easier to apply the effective tax rate to operating income? thanks again.
Edit: Meant to quote picton

 

[zttun86]

Analti_Calte_Equity wrote:
This stuff isn’t that hard when you see it on paper or in excel.
Also, the film industry is an odd one to look at to examine profits. Its better to look at something with widgets if you really want to learn the cogs of the business.

Thanks. but how would you go about approaching this problem, then? Can you give a hypothetical example? Cheers.

 

[picton]

zttun86 wrote:
Thank you for the reply. I was thinking along these lines too. You also bring up a good point about taxes- that they are difficult to apply to specific items. I am assuming it is incredibly difficult otherwise impossible to model taxes for each product/revenue generating item specifically, and much easier to apply the effective tax rate to operating income? thanks again.
Edit: Meant to quote picton

If at all, apply the tax rate to the pre-tax result, which can be different from operating income. But I would need to understand specifically what you are trying to do to really comment.