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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Contribution margin and contribution margin ratio

For a recent year, McDonald's company-owned restaurants bad the following sales and expenses (in millions):

Sales $18,169.3
Food and packaging $6,129.7
Payroll 4,756.0
Occupancy (rent, depreciation, etc.) 4,402.6
General, selling, and administrative expenses 2,487.9
  $17,776.2
Income from operations $ 393.1

Assume that the variable costs consist of food and packaging; payroll; and 40% of the general, selling, and administrative expenses.

  1. a. What is McDonald’s contribution margin? Round to the nearest tenth of a million (one decimal place).
  2. b.  What is McDonald’s contribution margin ratio? Round to one decimal place.
  3. c.  How much would income from operations increase if same-store sales increased by $500 million for the coming year, with no change in the contribution margin ratio or fixed costs? Round your answer to the nearest tenth of a million (one decimal place).

a.

To determine

Contribution Margin: It is defined as the difference between the sales and the variable cost.

Contribution Margin ratio: It is a ratio that measures the contribution margin generated by the company from the sales to make it avialable for paying the fixed cost and generate a profit. It is expressed as percentage of margin available from each dollar sales to pay fixed expenses and to provide profit. It is also called as profit-volume ratio. The formula to calculate the contribution margin ratio is as follows:

ContributionMarginRatio =ContributionMarginSales×100

To determine: contribution margin for M Company.

Explanation

Determine the contribution margin for M Company.

Sales =$18,169.3 million

Variable cost =$$11,880.9 million (1)

ContributionMargin=SalesVariablecost=$18,169.3$11,880.9=$6,288.4million

Working notes:

Determine the total variable cost.

Totalvariablecost=(Food

b.

To determine
contribution margin ratio for M Company.

c.

To determine
the increase in income from operations.

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