Question

Contribution Margin and Contribution Margin Ratio

For a recent year, McDonald’s (MCD) company-owned restaurants had the following sales and expenses (in millions):

Sales	$38,300
Food and packaging	$(10,274)
Payroll	(9,700)
Occupancy (rent, depreciation, etc.)	(11,576)
General, selling, and administrative expenses	(5,600)
	$(37,150)
Operating income	$1,150

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 operating income increase if same-store sales increased by $2,300 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

Variable costs = Food and packing + Payroll + (40%* general selling and administrative expenses)

= 10274+9700+(40%*5600) = 22214

Contribution margin = Sales - Variable costs = 38300 - 22214 = 16086

Contribution margin ratio = Contribution margin/Sales = 16086/38300 = 42%

Increase in operating income = 2300 million * 42% = 966 million