Question

1. 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	$22,900
Food and packaging	$(8,223)
Payroll	(5,800)
Occupancy (rent, depreciation, etc.)	(4,887)
General, selling, and administrative expenses	(3,300)
	$(22,210)
Operating income	$690

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 $1,400 million for the coming year, with no change in the contribution margin ratio or fixed costs? Round your answer to the closest million.
$ million

2. Break-Even Sales

Anheuser-Busch InBev SA/NV (BUD) reported the following operating information for a recent year:

Sales		$6,160,000
Cost of goods sold	$1,540,000
Selling, general, and administrative expenses	770,000	2,310,000
Operating income		$3,850,000*
*Before special items

In addition, assume that Anheuser-Busch InBev sold 55,000 barrels of beer during the year. Assume that variable costs were 75% of the cost of goods sold and 50% of selling, general, and administrative expenses. Assume that the remaining costs are fixed. For the following year, assume that Anheuser-Busch InBev expects pricing, variable costs per barrel, and fixed costs to remain constant, except that new distribution and general office facilities are expected to increase fixed costs by $23,100.

a. Compute the break-even number of barrels for the current year. Round to the nearest whole barrel.
barrels

b. Compute the anticipated break-even number of barrels for the following year. Round to the nearest whole barrel.
barrels

3.

Sales Mix and Break-Even Sales

Dragon Sports Inc. manufactures and sells two products, baseball bats and baseball gloves. The fixed costs are $218,400, and the sales mix is 40% bats and 60% gloves. The unit selling price and the unit variable cost for each product are as follows:

Products	Unit Selling Price		Unit Variable Cost
Bats	$40		$30
Gloves	100		60

a. Compute the break-even sales (units) for the overall enterprise product, E.
units

b. How many units of each product, baseball bats and baseball gloves, would be sold at the break-even point?

Baseball bats	units
Baseball gloves	units

4. Break-Even Sales and Sales Mix for a Service Company

Zero Turbulence Airline provides air transportation services between Los Angeles, California, and Kona, Hawaii. A single Los Angeles to Kona round-trip flight has the following operating statistics:

Fuel	$6,604
Flight crew salaries	5,058
Airplane depreciation	2,388
Variable cost per passenger—business class	55
Variable cost per passenger—economy class	45
Round-trip ticket price—business class	525
Round-trip ticket price—economy class	305

It is assumed that the fuel, crew salaries, and airplane depreciation are fixed, regardless of the number of seats sold for the round-trip flight.

a. Compute the break-even number of seats sold on a single round-trip flight for the overall enterprise product, E. Assume that the overall product mix is 10% business class and 90% economy class tickets.

Total number of seats at break-even

seats

b. How many business class and economy class seats would be sold at the break-even point?

Business class seats at break-even	seats
Economy class seats at break-even	seats

Answer 1

a.Contribution Margin = Sales revenues – Variable costs

= 22,900 – 8223-5800-3300*40%

= $7,557

b.Contribution Margin Ratio = Contribution Margin/Sales Revenues

= 7557/22900

= 33%

c.Operating Income will increase by the amount of increase in contribution margin as fixed costs will not change

= 1400 million*33%

= $462 million