Question

Contribution Margin and Contribution Margin Ratio For a recent year, McDonald's Company-owned restaurants had the following...

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

(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]

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