# E11-10 Contribution margin and contribution margin ratio For a recent year, McDonald's (MCD) company-owned restaurants had...

E11-10 Contribution margin and contribution margin ratio For a recent year, McDonald's (MCD) company-owned restaurants had the following sales a expenses (in millions): \$16,488 TL \$5,552 4,400 4,025 Sales Food and packaging Payroll Occupancy (rent, depreciation, etc.) General, selling, and admin. expenses Other expense Total expenses Operating income (loss) 2,434 209 (16,620) \$ (132) Assume that the variable costs consist of food and packaging, payroll, and 45% of the general, selling, and administrative expenses.
493 a. What is McDon b. What is McDonald c. How much would ope por COST-Volume-Profit Analysis McDonald's contribution margin? Round to the nearest million. is McDonald's contribution margin ratio? Round to one decimal place. - much would operating income increase if same store sales increased by 5500 Cillion for the coming year, with no change in the contribution margin ratio or fixed costs what would have been the operating income or loss for the recent year if sales had been \$500 million more? To achieve break even for the recent year, by how much would sales need to increase?

a.

Calculate contribution margin as follows:

 Sales 16488 Less variable expenses: Food and packaging 5552 Payroll 4400 General selling and administrative expenses (\$2,434 x 45%) 1095 Total variable expenses 11047 Contribution margin 5441

Contribution margin is \$5,441 million.

b.

Contribution margin ratio = Contribution margin / Sales = 5,441 / 16,488 = 0.33 or 33%

c.

Contribution margin ratio = 33.0%

Fixed costs do not change.

Therefore,

Increase in operating income = Increase in sales x Contribution margin ratio = \$500 x 33.0% = \$165 million

d.

Current operating income = - \$132 million

If sales increases by \$500 million, operating income will increase by \$165 million

Therefore,

Operating income if sales increases by \$500 million = -\$132 + \$165 = \$33 million

e.

Breakeven sales

= Fixed expenses / Contribution margin ratio

= [\$4025 + (\$2,434 x 55%) + 209] / 0.33

= \$5,573 / 0.33

= \$16,888 million

If the sales is \$1,839 million, breakeven can be achieved.

Therefore,

Increase in sales required to achieve breakeven = \$16,888 million - \$16,488 million = \$400 million

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