Question

Contribution Margin and Contribution Margin Ratio

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

Sales		$27,300
Food and packaging	$7,227
Payroll	7,200
Occupancy (rent, depreciation, etc.)	8,673
General, selling, and admin. expenses	4,200
Other expense	550
Total expenses		(27,850)
Operating income (loss)		$(550)

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? Enter your answer in million, rounded to one decimal place.
$ million

b. What is McDonald's contribution margin ratio? Round your percentage answer to one decimal place.
%

c. How much would operating income increase if same-store sales increased by $1,600 million for the coming year, with no change in the contribution margin ratio or fixed costs?
$ million

d. What would have been the operating income or loss for the recent year if sales had been $1,600 million more?
$ million

e. To achieve break even for the recent year, by how much would sales need to increase? Enter your anwer in million rounded to the nearest whole number.
$ million

Answer 1

A)

Contribution margin = Sales - Variable cost

Variable cost

= Food and packaging = 7,227

= Payroll = 7,200

= General expense= 40%*4,200 = 1,680

Total = 16,107

Contribution margin

= 27,300 - 16,107

= $11,193

B)

Contribution margin ratio = Contribution margin/ Sales

= 11,193/27,300

= 41%

C)

Increased sales = 27,300 + 1,600 = $28,900

Contribution margin ratio = 41%

Fixed cost

Occupany , rent = 8,673

General expense = 60%*4,200 = 2,520

Other expense = 550

Total = 11,743

Operating income = Contribution margin - Fixed cost

= 11,193 - 11,743

=( $550)

D)

Revised sales = 28,900

Variable cost = 16,107

Fixed cost = 11,743

Operating income = Revised sales - Variable cost - Fixed cost

= 28,900 - 16,107 - 11,743

= $1,050 gain

E)

Breakeven sales = Fixed cost/Contribution margin ratio

= 11,743/41%

= $28,641.46

Please note all the above figures are in milions.

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