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Mon Dec 30, 2013, 06:54 PM

What price increase would McDonald's need if they increased wages 35% to $10?..9.8% with same Profit

... found McDonalds P&L at (http://www.stock-analysis-on.net/NYSE/Company/McDonalds-Corp/Financial-Statement/Income-Statement). Wages expense comes to about 25% of revenues. With appropriate changes to their P&L, I found that a 9.8% increase in Prices (Revenues) would maintain the same profit rate (a healthy 19.8%). If the wage increase was spread over two years the annual price increase needed would be 4.8%.


A $2.00 order would increase to $2.10 the first year and $2.20 the second year. The increase to the workers wages would be, over two years, 35%.





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Response to Bill USA (Original post)

Mon Dec 30, 2013, 07:07 PM

1. Considering the price increases they've had the last 2 years

........like the McDouble increasing from $1 to $1.40, Big Mac from $2.80 to over $4.......

They can forget needing to raise prices and just pass along the increased profits they have already baked into their prices and cover raises.


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Response to Bill USA (Original post)

Mon Dec 30, 2013, 07:11 PM

2. Please explain calculations again as if I'm a five-year-old.

Skipped too many steps for my feeble brain.

But I'm very interested in the subject: How much would Big Mac prices go up with a 35% wage increase.

Can it really be less than 5%??

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Response to philly_bob (Reply #2)

Mon Dec 30, 2013, 08:55 PM

4. I didn't go into details as without looking at an excel spreadsheet it's fairly involved. I

downloaded the Profit and Loss statement as an Excel SS. ( At the link you will find a tiny image indicating you can download an excel spreadsheet of the Profit and Loss statement. )

Without going into too much detail, I factored computed what the labor cost percentage (of revenues) was for McDonalds owned stores and applied that percentage to the revenues from franchised restaurants to get the labor costs of the franchised restaurants. I appied the 35% increase tothe stated labor costs for McDonald's owned stores and tothe inferred labor costs for franchised outlets. This gives you th e price increase needed to cover increased labor costs. I did some factoring to bumpup revenues to keep the profit rate the same (explaining this process is really not feasible without an excel spreadsheet to show you).

Basically its this. Labor costs are about 25% of revenues. So an increase of 35% to a fraction (25%) of revenues means the increase to revenues will be about one fourth the size of the % increase to labor costs. You have to increase somewhat more than that if you figure in profit too. I can't pull up my SS now as Google site hosting won't let me.





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Response to Bill USA (Reply #4)

Tue Dec 31, 2013, 09:11 AM

7. Thanks. Your last paragraph nails it.

Labor costs are 25% of revenues. Increase labor costs by X% means you increase prices by X/4%. If X=35%, price increase = 35%/4 = 8.75%

At least that's what I get...

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Response to Bill USA (Original post)

Mon Dec 30, 2013, 07:59 PM

3. It may be less than that since at present they have lots of absenteeism

Maybe if they paid more their workers would show up more often.

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Response to Bill USA (Original post)

Mon Dec 30, 2013, 09:04 PM

5. Thank you for doing this, but why are you spreading the wage increase over two years?

 

Make in for one year and show the cost increase of an order in percentage. In other words, a wage increase to $10 per hour would increase the cost of an order X%, to keep the same profit margin.

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Response to rhett o rick (Reply #5)

Thu Jan 2, 2014, 04:40 PM

8. actually, in the OP I said the 35% increase in labor would require approx 9.8% increase in prices. I

spread it over two years as a business isn't likely to make a 35% increase to wages all in one year. .. also it spreads out the impact to prices - about 5% per year.







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Response to Bill USA (Original post)

Mon Dec 30, 2013, 09:32 PM

6. The better question would be

how much of a pay cut would upper level executives and management have to take for the pay raise for workers...

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Response to Cryptoad (Reply #6)

Thu Jan 2, 2014, 04:42 PM

9. Oh, you are obviously a commie! (note: satire being used.)

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