Question

Contribution Margin and Contribution Margin Ratio

For a recent year, McDonald's Company-owned restaurants had the following sales and expenses (in millions):

Sales	$36,600
Food and packaging	$13,934
Payroll	9,200
Occupancy (rent, depreciation, etc.)	7,066
General, selling, and administrative expenses	5,300
	$35,500
Income from operations	$1,100

Assume that the variable costs consist of food and packaging, payroll, and 40% of the general, selling, and administrative expenses.

a. What is McDonald's contribution margin? Round to the nearest million. (Give answer in millions of dollars.)
$ million

b. What is McDonald's contribution margin ratio?
%

c. How much would income from operations increase if same-store sales increased by $2,200 million for the coming year, with no change in the contribution margin ratio or fixed costs? Round your answer to the closest million.
$ million

Answer 1

Contribution Margin = Sales - Variable Expenses

Contribution Margin Ratio = (Sales - Variable Expenses) / Sales ( All Figures in $ Million)

(A) Contribution Margin:

Sales(1) 36,600

Variable Expense(2)

Food & Packaging 13,934

Payroll 9,200  

General Selling and Adm. expense 2,120

( 40% of 5,300)    25,254

Contribution Margin {(1) -(2)} 11,346

(B) Contribution Margin Ratio:

Contribution Margin (1) 11,346

Sales (2) 36,600

  Contribution Margin Ratio {(1) / (2) * 100} 31%

(C)

Revised Sales (36,600 + 2,200) (1)    38,800   

Revised Contribution Margin {(1) * 31%} 12,028

(-) Fixed Cost { 60% of 5,300 + 7,066 } 10,246

Income from Operations{ Contribution Margin - Fixed Cost } 1,782  

Income from Operations is increased by $ 682 Million ( 1,782 - 1,100)