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Contribution Margin and Contribution Margin Ratio For a recent year, McDugal's company-owned restaurants had the following...

Contribution Margin and Contribution Margin Ratio

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

Sales		$40,300
Food and packaging	$14,224
Payroll	10,700
Occupancy (rent, depreciation, etc.)	9,176
General, selling, and admin. expenses	6,200
Other expense	810
Total expenses		(41,110)
Operating income (loss)		$(810)

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? Enter your answer in million, rounded to one decimal place.
$ million

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 $2,400 million for the coming year, with no change in the contribution margin ratio or fixed costs?
$ million

d. What would have been the operating income or loss for the recent year if sales had been $2,400 million more?
$ million

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.

$ million

Solutions

Expert Solution

Contribution Margin

= Sales - Variable Cost(FOOD & PACKAGING + PAYROLL + 40% x GENERAL, SELLING, ADMINISTRATIVE EXPENSES)

= $40300 - $24924 (14224 + 10700 + 40% * 6200)

=$403000 - 24924$

= $15376

McDonald's contribution margin ratio

= Contribution Margin / Sales

= $15376/ $40300

= 0.381*100

= 38.1%

Increase in contribution

= Increase in sales x contribution margin ratio

= $2400 x 0.381

=$915.6

As the fixed cost reamains same, therefore increase in income = increase in contribution = $915.6 Million

Sales 40300+2400 =42700$

Total variable Cost 24924/40300*42700 =26408$

Contribution margin =16292$

Less:Fixed Cost 9176+810+(6200-2400) =13786$

Operating Income =2506$

Break-even point = fixed cost/contribution margin ratio

= $13786/0.381

= $36183.7million

40300 - 39183 = 4116$

4116 million sales need to increase, to achieve break even for the recent year.

ekkarill92 answered 1 year ago

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