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	$34,300
Food and packaging	$8,851
Payroll	8,700
Occupancy (rent, depreciation, etc.)	10,719
General, selling, and administrative expenses	5,000
	$33,270
Income from operations	$1,030

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 $2,100 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

Solution:

Given data,

Sales $34,300

Food and packaging $8,851

Payroll $8,700

Occupancy (rent, depreciation, etc.) $10,719

General, selling, and administrative expenses $5,000

Income from operations $1,030

From the given requirements we need to find the given requirements,

Total Variable cost =  ($8,851+$8700+($5000 *40%)

=$19,551

Total Fixed cost =  ($10,719+($5000 * 60%))

=$13,719

a. What is McDonald's contribution margin?

Contribution margin  = Sales - Variable cost

=($34,300 - $19,551)

=$14,749 million.

McDonald's contribution margin

$14,749 million.

b. What is McDonald's contribution margin ratio?

Contribution margin ratio = contribution / sales

= $14,749 / $34,300

= 0.43

= 43%

McDonald's contribution margin ratio

43%

c. How much would income from operations increase if same-store sales increased by $2,100 million for the coming year, with no change in the contribution margin ratio or fixed costs?

Increase in contribution will be = ($2100 * 43%)

=$903 million and the same would be the increase in income of operations.

Increase in contribution

$903 million