For a recent year, McDonald%u2019s company-owned restaurants had the following s

Question

For a recent year, McDonald%u2019s company-owned restaurants had the following sales and expenses (in millions):
Sales $16,561
Food and packaging $ 5,586
Payroll 4,300
Occupancy (rent, depreciation, etc.) 3,767
General, selling, and administrative expenses 2,355
$16,008
Income from operations $ 553

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.)
$

b. What is McDonald's contribution margin ratio? Round to one decimal place.
%

c. How much would income from operations increase if same-store sales increased by $400 million for the coming year, with no change in the contribution margin ratio or fixed costs? (Give answer in millions of dollars, rounded to one decimal place.)
$

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Contribution Margin = 16561 (Sales) - 5586 (Food and Packaging) - 4300 (Payroll) - 40%*2355 (General, selling, and administrative expenses) = 5733

Part B:

Contribution Ratio = Contribution Margin/Sales *100 = 5733/16561*100 = 34.61% or 34.6%

Part C:

Sales = 400 - (1-.346)*400 = 138.4 (since there is no change in fixed costs)

Income would increase by 138.4

Thanks.

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