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	$31,300
Food and packaging	$11,231
Payroll	7,900
Occupancy (rent, depreciation, etc.)	6,629
General, selling, and administrative expenses	4,600
	$30,360
Income from operations	$940

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 $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

(a). McDonald's contribution margin

Contribution Margin = Sales – Variable Expenses

Contribution Margin = $31,300 – [$11,231 + 7,900 + (4,600 x 40%)]

Contribution Margin = $31,300 – 20,971

Contribution Margin = $10,329 Million

(b). McDonald's contribution margin ratio

Contribution margin ratio = [Contribution / Sales] x 100

Contribution margin ratio = [$10,329 / 31,300] x 100

Contribution margin ratio = 33%

(c).Increase in income calculation

“Income from operations would increase by $700 Million”.

New sales [$31,300 + 1,900] = $ 33,200

Percentage increase of sales [$1,900 /33,200] = 0.0572

Total variable costs for the coming year [($20,971 x 0.0575) + $ 20,971] = $22,171

Fixed costs [$6,629 + (4,600 x 60%)] = $ 9,389

New income from operations [$33,200 – 22,171 – 9,389] = $1,640

Therefore, Change in income from operations = $700 Million [$1,640 – 940]