Question

For a recent year, McDugal's company-owned restaurants had the following sales and expenses (in millions): Sales $20,200 Food and packaging $7,702 Payroll 5,400 Occupancy (rent, depreciation, etc.) 3,998 General, selling, and admin. expenses 3,100 Other expense 400 Total expenses (20,600) Operating income (loss) $(400) 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 $1,200 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 $1,200 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

Answer 1

Income statement

Particulars		Amount (in million)
sales		20200
Less - Variable costs
- food and packaging	7702
- payroll	5400
- general selling and other (3100*40%)	1240	(14342)
Contribution		5858
Less - Fixed costs
- occupancy	3998
- General selling (60%*3100)	1860
- other expense	400	(6258)
Net income / (loss)		(400)

A) contribution margin = 5858 million

B) Contribution margin ratio = Contribution / sales * 100

= 5858/20200*100 = 29%

C) If sale increased by 1200 million

  new sales = 20200+1200 = 21400 million

new contribution= 21400*29% = 6206 million

Fixed cost = 6258

new net income / loss = contribution - fixed cost

= 6206 - 6258 = (52 million) (loss)

Increase in income = (400) - (52) = 348 million

D) If sale Had been 1200 million more (assuming variable cost remains same)

  new sales = 20200+1200 = 21400 million

Variable cost = 14342 million

new contribution= 21400 - 14342 = 7058

Fixed cost = 6258

new net income / loss = contribution - fixed cost

= 7058 - 6258 = 800 million

Note - Alternatively if it is assumed that contribution % remains same in this year then answer will be same as in part c.

E) Break even sales = fixed cost / contribution % (Assuming contribution % remains same)

= 6258 / 29%

= 21580 million

Increase required = 21580 - 20200

= 1380

Note - alternatively if variable cost remain same , break even sales can be sum of fixed and variable cost . i.e. (6258+14342) 20600. then increase required will be (20600-20200) 400 million.