Question

Contribution Margin and Contribution Margin Ratio

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

Sales	$32,300
Food and packaging	$10,369
Payroll	8,100
Occupancy (rent, depreciation, etc.)	8,161
General, selling, and administrative expenses	4,700
	$31,330
Income from operations	$970

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 $1,900 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

Sales	$ 32300
Less Variable Costs
Food and packaging	$      $10,369
Payroll	$ 8100
General, selling and administrative expenses	$ 1880
Total Variable Costs	$ 20349
Contribution Margin	$ 11951

b.
Contribution Margin Ratio = Contribution Margin / Sales x 100
= $11951 / $32300 x 100 = 37%

c.
New Sales = $32300 + $1900 = $34200
Contribution Margin = $34200 x 37% = $12654
Fixed Costs = $8161 + $4700 x 60% = $10980
Income from Operations = Contribution Margin - Fixed Costs
= $12654 - $10980 = $1674

here occupancy (rent, depreciation, etc.) is 100% fixed cost and  General, selling, and administrative expenses 60% part is fixed cost