Financial and Managerial Accounting, 13th Edition Carl S. Warren, James M. Reeve

Question

Financial and Managerial Accounting, 13th Edition Carl S. Warren, James M. Reeve, Jonathan E. Duchac

Contribution Margin and Contribution Margin Ratio

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

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 tenth of a million (one decimal place).
$ million

b. What is McDonald'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 nearest tenth of a million (one decimal place).
$ million

2.

Break-Even Sales and Sales to Realize Income from Operations

For the current year ended March 31, Benatar Company expects fixed costs of $1,250,000, a unit variable cost of $100, and a unit selling price of $140.

a. Compute the anticipated break-even sales (units).
units

b. Compute the sales (units) required to realize income from operations of $150,000.
units

Feedback

a. Fixed costs divided by the unit contribution margin equals break-even point in units.

b. (Fixed costs + Target profit) divided by unit contribution margin = sales units.

Learning Objective 3.

3.

Beck Inc. and Bryant Inc. have the following operating data:

a. Compute the operating leverage for Beck Inc. and Bryant Inc. If required, round to one decimal place.

b. How much would income from operations increase for each company if the sales of each increased by 20%? If required, round answers to nearest whole number.

c. The difference in the of income from operations is due to the difference in the operating leverages. Beck Inc.'s operating leverage means that its fixed costs are a percentage of contribution margin than are Bryant Inc.'s.

Sales $18,602.5 Food and packaging $ 6,318.2 Payroll 4,710.3 Occupancy (rent, depreciation, etc.) 4,195.2 General, selling, and administrative expenses 2,445.2 17,668.9 Income from operations $  933.6

Explanation / Answer

1. a. Contribution Margin for MacDonald's = Sales - Variable Costs Variable Costs = $ 6,318.20 million + $ 4,710.30 million + (40% of $ 2,445.20 million) = $ 12,006.58 million Hence, the contribution margin will be $ 18,602.50 - $ 12,006.58 = $ 6,595.92 million b. Contribution Margin Ratio = Contribution Margin / Sales = $ 6,595,92 / $ 18,602.50 = 35.5% c. If the store sales increase by $ 900 million, the revised sales will be $ 18,602.50 + $ 900 = $ 19,502.50 million At a contribution margin of 35.5%, the Net Contribution will be 35.5% of $ 19,602.50 = $ 6,958.89 million 2. a. Let us assume the breakeven sales in units as X Breakeven is a point where Sales = Costs Hence, 140X = 100X + $ 1,250,000 or 40X = $ 1,250,000 Therefore X = 31,250 units b. Net Income from Current Operations will be 0 For an income of $ 150,000, let us assume the number of units sold as X Now, 140X - 100X - $ 1,250,000 = $ 150,000 Hence, 40 X = $ 1,400,000 or X = 35,000 units 3. a. Operating Leverage is defined as the percentage of Fixed Costs to Total Costs for a product So, for Beck Inc, the Operating Leverage will be $ 400,000 / ( $ 400,000 + $ 750,000) = 34.8% For Byrant Inc. the Operating Leverage will be $ 450,000 / ( $ 450,000 + $ 1,250,000) = 26.5% b. Current Contribution Margin ratio for Operating Leverage for Beck Inc. $ 500,000 / $ 1,250,000 = 40% Beck Inc. 65.2% Byrant Inc. $ 750,000 / $ 2,000,000 = 37.50% Byrant Inc. 73.5% If the sales increase by 20% for both, then the revised contribution margins will be For Beck Inc. 600000 $ For Byrant Inc. 900000 $ With the fixed costs remaining unchanged, the revised Income from Operations and the percentage change as compared to the existing numbers will be For Beck Inc. 500000 $ 500% For Byrant Inc. 600000 $ 200% c. The difference in the substantial increase of income from operations is due to the difference in the operating leverages. Beck Inc.'s higher operating leverage means that its fixed costs are a lower  percentage of contribution margin than are Bryant Inc.'s.

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