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):

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

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:

	Beck Inc.		Bryant Inc.
Sales	$1,250,000		$2,000,000
Variable costs	750,000		1,250,000
Contribution margin	$500,000		$750,000
Fixed costs	400,000		450,000
Income from operations	$100,000		$300,000

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

Beck Inc.
Bryant Inc.

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.

	Dollars	Percentage
Beck Inc.	$	%
Bryant Inc.	$	%

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.