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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Contribution margin and contribution margin ratio
For a recent year. McDonald's (MCD) company-owned restaurants had the following sales and expenses (in millions):


Assume that the variable costs consist of food and packaging, payroll, and 45% of the general, selling, and administrative expenses.

a. What is McDonald's contribution margin? Round to the nearest million.
b.What is McDonald's contribution margin ratio? Round to one decimal place.
c. How much would operating income increase if same-store sales increased by $500 million for the coming year, with no change in the contribution margin ratio or fixed costs?
d.What would have been the operating income or loss for the recent year if sales had been $500 million more?
e.To achieve break even for the recent year, by how much would sales need to increase?

To determine

(a)

Concept introduction:

Contribution margin is the difference between the sales and variable cost. In other words, it is computed by subtracting thevariable cost from sales.

To compute:

The Contribution margin.

Explanation

Sale is $16,488

Variable Cost is $11,047.30 ($5,552+$4,400+($2,434×0

To determine

(b)

Concept introduction:

Contribution margin is the difference between the sales and variable cost. In other words, it is computed by subtracting thevariable cost from sales.

To compute:

The Contribution Margin Ratio.

To determine

(c)

Concept introduction:

Operating income is earned by the business operations in the normal course of business. This income is computed by setting off all expenses from the sales revenue.

The operating income increased in next year if sale increased by $500 Million.

To determine

(d)

Concept introduction:

Operating income is the one which is earned by the business operations in the normal course of business. This income is computed by setting off all expenses from the sales revenue.

The operating income for recent year if sale increased by $500 Million.

To determine

(e)

Concept introduction:

The break-even point is the level of production at which the contribution earned recovers the fixed cost of the company, i.e., no profit no loss situation.

The sales that should be increased in current year so as to achieve the break-even.

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