Question

Contribution Margin and Contribution Margin Ratio

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

Sales $39,800

Food and packaging $10,764

Payroll 10,000

Occupancy (rent, depreciation, etc.) 12,046

General, selling, and administrative expenses 5,800

$38,610

Income from operations $1,190

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? Round to the nearest million. (Give answer in millions of dollars.) $____ million

b. What is McDonald's contribution margin ratio?____ %

c. How much would income from operations 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? Round your answer to the closest million. $_____ million

Answer 1

• All working forms part of the answer
• Amounts are in $ Millions
• Working for Variable cost and Fixed Cost

Cost	Variable	Fixed
Food & packaging	$10764
payRoll	$10000
Occupancy		$12046
General Selling Administrative expenses	$2320 [5800 x 40%]	$3480 [5800 x 60%]
Total	$23,084	$15,526

• Answers

A	Sales	$39800
B	Total variable cost	$23084
C=A-B	Contribution margin [Answer (a)]	$16,716
D=(C/A) x 100	Contribution margin ratio [Answer (b)]	42%

A	Sales increased by	$2,400
B= A x 42%	Net Income would increase by [Answer (c)]	$1,008