Contribution Margin and Contribution Margin Ratio For a recent year, McDonald\'s
ID: 2430203 • Letter: C
Question
Contribution Margin and Contribution Margin Ratio
For a recent year, McDonald's Company-owned restaurants had the following sales and expenses (in millions):
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
Explanation / Answer
(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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