Question

Contribution Margin and Contribution Margin Ratio

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

Sales	$19,300
Food and packaging	$6,911
Payroll	4,900
Occupancy (rent, depreciation, etc.)	4,109
General, selling, and administrative expenses	2,800
	$18,720
Income from operations	$580

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 $1,200 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

a) Contribution margin is $ 6369 Million

b) Contribution margin ratio is 33%

c) If sales incresed by $1200 Million in the next year with no change n contribution ratio or fixed cost, profit from operations will be $ 976 Million. Hence increase in profit will be (976-580) $ 396 Million

	$ in Million	$ in Million
Sales	19300	20500
Less: Variable cost
Food & Packaging	6911
Payroll	4900
General, selling & Admin. Expenses(2800*40%)	1120
Total Variable cost	12931
Contribution Margin	6369	6765
Contribution Margin Ratio	33.0%	33.0%
Less: Fixed cost
Occupancy charges	4109	4109
General, selling & Admin. Expenses(2800*60%)	1680	1680
Total Fixed cost	5789	5789
Net Profit	580	976	396