Contribution Margin and Contribution Margin Ratio
For a recent year, Wicker Company-owned restaurants had the following sales and expenses (in millions):
Sales | $14,300 |
Food and packaging | $6,142 |
Payroll | 3,600 |
Occupancy (rent, depreciation, etc.) | 2,028 |
General, selling, and administrative expenses | 2,100 |
$13,870 | |
Income from operations | $430 |
Assume that the variable costs consist of food and packaging, payroll, and 40% of the general, selling, and administrative expenses.
a. What is Wicker Company's contribution
margin? Round to the nearest million. (Give answer in millions of
dollars.)
$ million
b. What is Wicker Company's contribution margin
ratio? Round to one decimal place.
%
c. How much would income from operations
increase if same-store sales increased by $900 million for the
coming year, with no change in the contribution margin ratio or
fixed costs? Round your answer to the closest million.
$ million
a.
Variable costs = Food and packaging + payroll + 40% of general, selling and administrative expenses.
= 6,142 + 3,600 + (2,100*40%)
= 10,582
Contributiuon margin = Sales - Variable costs
= 14,300 - 10,582
= 3,718
b.
Contributuion margin ratio = Contribution margin / Sales
= 3,718 / 14,300
= 26%
c.
New sales = 14,300 + 900 = 15,200
Contribution margin = 15,200 * 26% = 3,952
Fixed costs = Occupancy rent + 60% of general, selling and administrative expenses
= 2,028 + (2,100*60%)
= 3,288
Income from operations = Contribution margin - Fixed costs
= 3,952 - 3,288
= 664
Increase in Income from operations = 664 - 430 = 234 million
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