Question

Contribution Margin and Contribution Margin Ratio

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

Sales	$15,295.0
Food and packaging	$(4,896.9)
Payroll	(4,134.2)
Occupancy (rent, depreciation, etc.)	(3,667.7)
General, selling, and administrative expenses	(2,384.5)
	$(15,083.3)
Operating income	$211.7

Assume that the variable costs consist of food and packaging, payroll, and 40% of the general, selling, and administrative expenses.

c. How much would operating income increase if same-store sales increased by $800 million for the coming year, with no change in the contribution margin ratio or fixed costs? Round your answer to the nearest tenth of a million (one decimal place).
$fill in the blank 3 million

the answer is not 277.8

Answer 1

Working notes

Calulation of variable cost

Food and packaging $4896.9

Payroll $4134.2

Occupancy (rent, depreciation, etc.) $3667.7

General, selling, and administrative expenses $953.8

Total variable cost $13652.6

Precentage of variable cost on sale = $13652.6 / $15295 *100 =89.26%

Fixed cost = $2384.5 - $953.8 = $1430.7

Calculation of Operating income

Sales ($15295 + $800) = $16095

Less: Variable cost (89.26%) = $14366.4

contibution = $1728.6

Less: Fixed cost = $1430.7

operating Profit = $ 297.9

Increase operating profit due to increase sales = ($297.9 - 211.7) = $86.2

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