Question

Contribution Margin and Contribution Margin Ratlo For a recent year, McDonald's Companmy-owned restaurants had the following sales and expenses (in millions) Sales $22,000 Food and packaging $7,960 Payroll 5,500 Occupancy (rent, depreciation, etc.) 4,680 General, selling, and administrative expenses 3,200 $21,340 Income from operations $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? Round to the nearest milion. (Glve answer in millions of dollars.) milon b. What is HcDonald's contribution margin ratio % C. How much would Income from operations increase if same-store sales increased by $1,300 milion for the coming year, with no change in the contribution margin ratio or fxed costs? Round your answer to the dosest mil millon

Answer 1

Solution:
a)
Calculation of McDonald's Contribution margin:
		Amount in Millions
Sales	$	22000
Less: Variable cost
Food and packaging	$	7960
Payroll	$	5500
General ,selling and administrative expenses	$	1280
Variable cost is 40% of General, selling and administrative expenses (40 % *$3200)
Total Variable cost	$	14740
Contribution margin	$	7260
(Sales - Variable Cost)
McDonald's Contribution margin = $7260 Million
b)
Calculation of McDonald's Contribution margin ratio:
Contribution margin ratio = Contribution Margin/Sales (Expressed in %)
$7260/$22000
33%
McDonald's Contribution margin ratio = 33%
c)
Calculation of increase in Income from Operations:
Increase in Income from Operation = Increase in sale *Contribution margin Ratio
$1300*33%
429
Income From Operation would increase by $429 Million
As there is no change in Fixed Cost, Increase in Contribution margin = Income From operation
Therefore we have Multiplied Increase in sales * Contribution margin ratio