21-3 Excercises & Problems Contribution Margin and Contribution Margin Ratio For

Question

21-3 Excercises & Problems Contribution Margin and Contribution Margin Ratio For a recent year, Wicker Company-owned restaurants had the following sales and expenses (in millions): Sales Food and packaging Payroll Occupancy (rent, depreciation, etc.) General, selling, and administrative expenses $29,000 $7,840 7,300 8,790 4,200 $28,130 $870 Income from operations 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 $1,700 million for the coming year, with no change in the contribution margin ratio or fixed costs? Round your answer to the closest million. million

Explanation / Answer

(a).Wicker Company’s contribution margin

Contribution Margin = Sales – Variable Expenses

Contribution Margin = $ 29000 – ( $ 7840+7300+ ($ 4200 x 0.40 ))

Contribution Margin = $ 29000 - $ 16820

Contribution Margin = $ 12,180

(b). Wicker Company’s contribution margin ratio

Contribution margin ratio = Contribution / Sales * 100

Contribution margin ratio = $ 12,180 / $ 29,000 * 100

Contribution margin ratio = 42%

(c).Increase in income calculation

“ Income from operations would increase by $859”.

New sales [$ 29000+$ 1700] = $ 30,700

Percentage increase of sales [$ 1700/$ 30700] = 0.05

Total variable costs for the coming year [(0.05*$16820)+ $16820] = $17,661

Fixed costs: [($ 4200*0.60)+ $8790] = $11310

New income from operations [$30700 – 17661-11310] = $1729

Change in income from operations: [$1729 - $870] = $859

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