Question

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

Sales	$30,700
Food and packaging	$9,227
Payroll	7,700
Occupancy (rent, depreciation, etc.)	8,353
General, selling, and administrative expenses	4,500
	$29,780
Income from operations	$920

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 $1,800 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).Wicker Company’s contribution margin

Contribution Margin = Sales – Variable Expenses

Contribution Margin = $ 30700 – ( $ 9227 + 7700 + ($ 4500 x 0.40 ))

Contribution Margin = $ 30700 - $ 18727

Contribution Margin = $ 11973

(b). Wicker Company’s contribution margin ratio

Contribution margin ratio = Contribution / Sales * 100

Contribution margin ratio = $ 11973 / $ 30700 * 100

Contribution margin ratio = 39%

(c).Increase in income calculation

“ Income from operations would increase by $770”.

New sales [$ 30700+$ 1800] = $ 32,500

Percentage increase of sales [$ 1800/$ 32500] = 0.055

Total variable costs for the coming year [(0.055*$18727)+ $18727] = $19757

Fixed costs: [($ 4500*0.60)+ $8,353] = $11053

New income from operations [$32500 – 19757-11053] = $1690

Change in income from operations: [$1690 - $920] = $770