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	$40,300
Food and packaging	$13,635
Payroll	10,200
Occupancy (rent, depreciation, etc.)	9,355
General, selling, and administrative expenses	5,900
	$39,090
Income from operations	$1,210

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

Variable Costs = Food and packaging + Payroll + 40 % of GS&A Expenses

= $ 13635 + $ 10200 + ( 0.4 * 5900)

= $ 26195

Sales = $ 40300

a ) Contribution Margin = Sales - Variable Costs

= $ 40300 - $ 26195

= $ 14105

b) Contribution Margin Ratio = Contribution Margin / Sales

= $ 14105 / $ 40300

= 0.35

c) Fixed Cost = Total Cost - Variable Cost

= $ 39090 - $ 26195

= $ 12895

New Sales = $ 40300 + $ 2400

= $ 42700

Contribution Margin Ratio = 0.35 = (New Sales - New Variable Cost) / New Variable Cost

( $ 42700 - NVC ) / $ 42700 = 0.35

NVC = $ 42700 - ( 0.35 * $ 42700 )

= $ 27755

New Income = Sales - Fixed Costs - New Variable Costs

= $ 42700 - $ 12895 - $ 27755

= $ 2050

Change in Income = $ 2050 - $ 1210 = $ 840