Question

Contribution Margin and Contribution Margin Ratio

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

Sales	$14,700
Food and packaging	$6,044
Payroll	3,700
Occupancy (rent, depreciation, etc.)	2,416
General, selling, and administrative expenses	2,100
	$14,260
Income from operations	$440

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

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

b. What is Wicker Company's contribution margin ratio? Round to one decimal place.
%

c. How much would income from operations increase if same-store sales increased by $900 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

Answer:

(Answers are in Millions)

Total Variable expenses = $6,044 + $3,700 + 40% of $2,100 = $9,744 + $840 = $10,584

Total Fixed expenses = $2,416 + 60% of $2,100 = $2,416 + $1,260 = $3,676

a. Contribution Margin

Contribution Margin = Sales - Variable cost = $14,700 - $10,584 = $4,116

b. Contribution Margin Ratio

Contribution Margin Ratio = (Contribution Margin / Sales) * 100

                                     = ($4,116 / $14,700) * 100

                                     = 0.28 or 28%

                                     = 28%

c. Increase in Income from operations if Sales increase by $900 million

Revised Sales = $14,700 + $900 = $15,600

Revised Contribution margin = Sales * Contribution margin ratio = $15,600 * 28% = $4,368

Revised Income from operations = Contribution margin - Fixed cost = $4,368 - $3,676 = $692

So, the increase in Income from operations if Sales are increased by $900 million

= $692 - $440

= $252