Question

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

Sales $36,000

Food and packaging $8,820

Payroll 9,500

Occupancy (rent, depreciation, etc.) 12,180

General, selling, and admin. expenses 5,500

Other expense 720

Total expenses (36,720)

Operating income (loss) $(720)

a. What is McDonald's contribution margin? Enter your answer in million, rounded to one decimal place.

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 $2,200 million for the coming year, with no change in the contribution margin ratio or fixed costs?

d. What would have been the operating income or loss for the recent year if sales had been $2,200 million more?

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.

Answer 1

For calculating contribution margin,we have to classify the above total expense into fixed expense and variable expense.Fixed costs are constant regardless of activity level and variable costs change proportionately with output.Here, we are given with following types of expenses namely: Food and packaging, Payroll, Occupancy, General,selling& administration and other expenses.

We are assuming that "Food and packaging" and "Payroll" are variable costs and all others are fixed costs.

A) Calculation of McDugal's Contribution Margin:

Contribution Margin = Sales - Variable Costs

Sales = $36,000 million

Variable cost(food & packaging) = $8,820 million

Variable cost(payroll) = $9,500 million

Contribution Margin = 36,000 - 8,820 - 9,500 = $17,680 million

B) Calculation of McDugal's Contribution Margin Ratio:

Contribution Margin Ratio = (Contribution Margin / Sales) * 100 = (17,680 / 36,000) * 100 = 49.11%

Therefore, Contribution Margin Ratio = 49.11%

C) Increase in Sales by 2,200 million with same contribution margin ratio and fixed cost:

Revised Sales = $36,000 million + $2,200 million = $38,200 million

If contribution margin ratio is same as calculated above,

then contribution margin = Revised sales * Contribution Margin Ratio = $38,200 million * 49.11% = $18,760 million

Fixed costs = 12,180 + 5,500 + 720 = $18,400 million

Operating Income = Contribution Margin - Fixed Costs = $ 18,760 million - $ 18,400 million = $360 million

Therefore, Increase in operating income for coming year = $360 million - ($720 million) = $1,080 million

D) If sales had been $2,200 million more in recent year:

Particulars	Amount(in million $)
Sales	38,200
Less: Variable cost	18,320
Contribution margin	19,880
Less: Fixed cost	18,400
Operating Income	1,480

If sales would have been $38,200 million in recent year then operating income would be $1480 million.

(Note: It is given in question that initial sales would be $2,200 million more but nothing is given for any of the costs. Therefore, all the costs are assumed to be same as given in the question originally.)

E) Increase in sales to achieve break-even:

Break-even Sales = Fixed Cost / Contribution margin ratio = $18,400 million / 49.11% = $37,466.91 million

= $37,467 million(round off)

Therefore, increase in sales required to achieve break even = Break- even Sales - Actual Sales

= $37,467 million - $36,000 million

= $1,467 million.

Notes:

i)Payroll expenses are related to wages and are thus assumed as variable.

ii)Nature of other expenses of $720 is not specified and therefore, assumed as fixed.