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	$27,400
Food and packaging	$7,118
Payroll	6,900
Occupancy (rent, depreciation, etc.)	8,562
General, selling, and administrative expenses	4,000
	$26,580
Income from operations	$820

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 $1,600 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

• All working forms part of the answer
• Working

	Total Cost	Total Variable cost	Total Fixed Cost
Food and packaging	$          7,118.00	$             7,118.00
Payroll	$          6,900.00	$             6,900.00
Occupancy (rent, depreciation, etc.)	$          8,562.00		$             8,562.00
General, selling, and administrative expenses	$          4,000.00	$             1,600.00	$             2,400.00
TOTAL	$            26,580.00	$           15,618.00	$           10,962.00

• Requirement ‘a’

A	Sales	$            27,400.00
B	Total Variable cost	$            15,618.00
C = A - B	Contribution margin	$            11,782.00 million = answer

• Requirement ‘b’

A	Contribution margin	$            11,782.00
B	Sales	$            27,400.00
C = (A/B) x 100	Contribution margin ratio	43.00% = answer

• Requirement ‘c’

A	Increase in Sales	$              1,600.00
B	Contribution margin ratio	43.00%
C = A x B	Income from Operation would increase by	$                  688.00 million = Answer