Question

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

Sales $28,600
Food and packaging $9,710
Payroll 7,200
Occupancy (rent, depreciation, etc.) 6,630
General, selling, and administrative expenses 4,200
$27,740
Income from operations $860

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)
b. What is McDonald's contribution margin ratio? Round to one decimal place.
c. How much would income from operation increase if the 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)

Answer 1

a. What is McDonald's contribution margin?

contribution margin = total sales - total variable costs = $28,600 - [$9,710 + $7,200 + (0.4 x $4,200)] = $10,010

b. What is McDonald's contribution margin ratio?

contribution margin ratio = contribution margin / total sales = $10,010 / $28,600 = 0.35 ≈ 0.4

c. How much would income from operation increase if the same-store sales increased by $900 million for the coming year, with NO change in the contribution margin ratio or fixed costs?

increase in total contribution margin = $900 x 0.35 = $315

Income from operations will increase by $315 million