Question

E11-10 Contribution margin and contribution margin ratio For a recent year, McDonald's (MCD) company-owned restaurants had the following sales a expenses (in millions): $16,488 TL $5,552 4,400 4,025 Sales Food and packaging Payroll Occupancy (rent, depreciation, etc.) General, selling, and admin. expenses Other expense Total expenses Operating income (loss) 2,434 209 (16,620) $ (132) Assume that the variable costs consist of food and packaging, payroll, and 45% of the general, selling, and administrative expenses.

Answer 1

a.

Calculate contribution margin as follows:

Sales		16488
Less variable expenses:
Food and packaging	5552
Payroll	4400
General selling and administrative expenses ($2,434 x 45%)	1095
Total variable expenses		11047
Contribution margin		5441

Contribution margin is $5,441 million.

b.

Contribution margin ratio = Contribution margin / Sales = 5,441 / 16,488 = 0.33 or 33%

c.

Contribution margin ratio = 33.0%

Fixed costs do not change.

Therefore,

Increase in operating income = Increase in sales x Contribution margin ratio = $500 x 33.0% = $165 million

d.

Current operating income = - $132 million

If sales increases by $500 million, operating income will increase by $165 million

Therefore,

Operating income if sales increases by $500 million = -$132 + $165 = $33 million

e.

Breakeven sales

= Fixed expenses / Contribution margin ratio

= [$4025 + ($2,434 x 55%) + 209] / 0.33

= $5,573 / 0.33

= $16,888 million

If the sales is $1,839 million, breakeven can be achieved.

Therefore,

Increase in sales required to achieve breakeven = $16,888 million - $16,488 million = $400 million