Question

Contribution Margin and Contribution Margin Ratio For a recent year, McDugal's company-owned restaurants had the following sales and expenses (in millions) Sales $32,700 Food and packaging $8,593 Payroll 8,700 Occupancy (rent, depreciation, etc.) 10,407 General, selling, and admin. expenses 5,000 Other expense 650 Total expenses (33,350) $(650) Operating income (loss) Assume that the variable costs consist of food and packaging, payroll, and 40% of the general, selling, and administrative expenses.

Answer 1

Solution Analysis of total expenses as Variable expenses and fixed expenses Food and packaging Payroll Occupancy (rent, depreciation etc.) General, selling and admin. Expenses Other expenses Total expenses Total Expenses $8,593.0 $8,700.0 $10,407.0 $5,000.0 $650.0 $33,350.0 (figures in millions) Variable Fixed Expenses Expenses $8,593.0 $0.0 $8,700.0 $0.0 $0.0 $10,407.0 $2,000.0 $3,000.0 $0.0 $650.0 $19,293.0 $14,057.0 Required a.: Computation of contribution margin Sales Less: Variable expenses Contribution Margin (figures in millions) $32,700.0 ($19,293.0) $13,407.0 Contribution Margin $13,407.0 Required b.: Contribution Margin Ratio = Contribution Margin Total sales $13,407.0 $32,700.0 41.0% Contribution Margin Ratio 41.0% Required c.: Incremental sales Contribution margin ratio Incremental contribution margin ($2,000 x 41.0%) Less: Incremental fixed cost Incremental operating income (figures in millions) $2,000.0 41.0% $820.0 $0.0 $820.0 Operating income would increase by $820.0 millions. Operating income increase by $820.0

Required d.: Sales ($32,700 + $2,000) Contribution margin ratio Contribution margin ($34,700 x 41.0%) Less: Fixed cost Operating income (figures in millions) $34,700.0 41.0% $14,227.0 ($14,057.0) $170.0 If the sales had been $2,000 million more, the operating income would have been $170.0 million. Operating Income | $170.0 Required e.: Breakeven point is the point at which the company neither makes any profit, nor incurrs any losses. Currently the company is making losses of $650 millions. We can calculate the sales that need to increase, to achieve the breakeven, as under: Operating income (loss) ($650.0) millions Additional sales required to achieve breakeven = $650 millions / 41.0% $1,585 millions Sales needs to increase by $1,585 millions