Question

Contribution Margin and Contribution Margin Ratio

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

Sales	$21,500
Food and packaging	$8,410
Payroll	5,400
Occupancy (rent, depreciation, etc.)	3,950
General, selling, and administrative expenses	3,100
	$20,860
Income from operations	$640

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 $1,300 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). Contribution margin = $6450 million

Explanation;

Contribution margin = Sales – Variable costs

Sales = $21500 million

Variable costs ($8410 + $5400) + ($3100 * 0.40)

= $13810 + $1240

= $15050 million

Hence, contribution margin ($21500 – $15050) = $6450 million

(b). Contribution margin ratio = 30%

Explanation;

Contribution margin ratio = Contribution margin / Sales

Contribution margin ratio = $6450 / $21500

= 30%

(c). Income from operations increased by = $390 million

Explanation;

Income from operations increased by ($1300 * 0.30) = $390 million