Question

Contribution Margin and Contribution Margin Ratio

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

Sales	$25,600
Food and packaging	$6,356
Payroll	6,500
Occupancy (rent, depreciation, etc.)	8,274
General, selling, and administrative expenses	3,700
	$24,830
Income from operations	$770

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 $1,500 million for the coming year, with no change in the contribution margin ratio or fixed costs? Round your answer to the closest million.

Answer 1

a)

	$ in Million	$ in Million
Sales		$                25,600
Less: Variable Costs
Food and Packaging	$                 6,356
Payroll	6,500
General, Selling and Administrative Expenses	1,480	14,336
Contribution Margin		$               11,264

Variable General, Selling and Administrative Expenses = 40% of $3,700 = $1,480 ($ in millions)

b)

Contribution Margin Ratio = (Contribution Margin / Sales Revenue) x 100

= ($11,264 / $25,600) x 100 ($ in millions) = 44%

c)

	$ in Million	$ in Million
Sales		$                27,100
Less: Variable Costs
Food and Packaging	$                 6,728
Payroll	6,881
Variable General, Selling and Administrative Expenses	1,567	15,176
Less: Fixed Costs
Occupancy	8,274
Fixed General, Selling and Administrative Expenses	2,220	10,494
Income from Operations		$                  1,430

Working Note:

	Computation	$ in Million
Sales	$25,600 + $1,500	$                     27,100
Food and Packaging	$6,356 x ($27,100 / $25,600)	6,728
Payroll	$6,500 x ($27,100 / $25,600)	6,881
Variable General, Selling and Administrative Expenses	$1,480 x ($27,100 / $25,600)	1,567
Occupancy	Given	8,274
Fixed General, Selling and Administrative Expenses	$3,700 - $1,480	2,220