Contribution Margin and Contribution Margin Ratio For a recent year, McDugal\'s

Question

Contribution Margin and Contribution Margin Ratio For a recent year, McDugal's company-owned restaurants had the following sales and expenses (in millions): Sales $32,800 $8,652 Food and packaging Payroll 8,700 Occupancy (rent, depreciation, etc.) 10,448 General, selling, and admin. expenses 5,000 Other expense 660 Total expenses (33,460) Operating income (loss) $(660) 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? Enter your answer in million, rounded to one decimal place. million b. What is McDonald's contribution margin ratio? Round your percentage answer to one decimal place.

Explanation / Answer

Answer

A)

Contribution Margin

= Sales - Variable Cost(FOOD & PACKAGING + PAYROLL + 40% x GENERAL, SELLING, ADMINISTRATIVE EXPENSES)

= $32800 - $19352 (8652 + 8700 + 40% * 5000)

= $13448

B)

McDonald's contribution margin ratio

= Contribution Margin / Sales

= $13448 / $32800

= 0.41

C)

Increase in contribution

= Increase in sales x contribution margin ratio

= $2000 x 0.41

=$820

As the fixed cost reamains same, therefore increase in income = increase in contribution = $820 Million

D)

Sales 32800+2000                                             =34800

Total variable Cost 19352/32800*34800                =10240

Contribution margin                                            =24560

Less:Fixed Cost 10448+660+(5000-2000)            =14108

Operating Income                                =10452

E)

Break-even point = fixed cost/contribution margin ratio

= $14108/0.41

= $34410million

1610million ($34410-$32800) sales need to increase, to achieve break even for the recent year.

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