For a recent year, McDonald\'s (MCD) company-owned restaurants had the following

Question

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

Assume that the Costs that vary in total dollar amount as the level of activity changes.variable costs consist of food and packaging, payroll, and 40% of the general, selling, and administrative expenses.

a. What is McDonald's contribution margin? Enter your answer in million, rounded to one decimal place.
$ million

b. What is McDonald's contribution margin ratio? Round your percentage answer to one decimal place.
%

c. How much would operating income increase if same-store sales increased by $1,300 million for the coming year, with no change in the contribution margin ratio or Costs that tend to remain the same in amount, regardless of variations in the level of activity.fixed costs?
$ million

d. What would have been the operating income or loss for the recent year if sales had been $1,300 million more?
$ million

e. To achieve break even for the recent year, by how much would sales need to increase? Enter your anwer in million rounded to the nearest whole number.
$ million

Sales   $22,100 Food and packaging   $8,590 Payroll 5,600 Occupancy (rent, depreciation, etc.) 3,610 General, selling, and admin. expenses    3,200 Other expense 440 Total expenses (21,440) Operating income (loss) $660

Explanation / Answer

Mc Donald

Contribution margin = sales – variable cost

Sales                                                                           $22,100

Variable costs –

Food and packaging                                                   $8,590

Payroll                                                                                    $5,600

40% of general selling and administration expenses            $1,280

Total variable costs                                                    $15,470

Contribution margin                                                   $6,630 millions

Hence, the contribution margin of Mc Donald is $6,630 million

Contribution margin ratio = (Contribution/sales prices) x100

            = ($6,630/$22,100) x 100 =30%

Hence, Mc Donald’s contribution margin ratio = 30%

Increase in sales - $1,300M

Percent increase in sales = 1,300/22,100 = 5.88%

Increase in variable costs = $910 m (15,470 x 5.88%)

So, revised sales = $22,100 + $1,300 = $23,400 million and

Revised variable costs = $15,470 + $910 = $16,380

The contribution margin at this level of activity = 30% x5.88 % increase in sales = 30% x $23,400

Hence, contribution margin                                       $7,020 million

Less: Fixed costs –

General selling and administration expenses (60% fixed) $1,920

Occupancy (depreciation, rent etc)                                        $3,610

Other expenses                                                                       $440

Total fixed expenses                                                              $5,970 million

Operating income/ (loss)                                                        $1,050 million

Increase in operating income = (increased income/original income) x 100

= ($390/$660) x 100 = 59.1%

Break-even point = fixed cost/contribution margin ratio

= $5970/30% = $19,900million

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