Question

Territory and Product Profitability Analysis

Coast to Coast Surfboards Inc. manufactures and sells two styles of surfboards, Atlantic Wave and Pacific Pounder. These surfboards are sold in two regions, East Coast and West Coast. Information about the two surfboards is as follows:

	Atlantic Wave		Pacific Pounder
Sales price	$450		$400
Variable cost of goods sold per unit	(167)		(192)
Manufacturing margin per unit	$283		$208
Variable selling expense per unit	(202)		(104)
Contribution margin per unit	$81		$104

The sales unit volume for the territories and products for the period is as follows:

	East Coast		West Coast
Atlantic Wave	3,020		1,510
Pacific Pounder	0		1,510

a. Prepare a contribution margin by sales territory report. Compute the contribution margin ratio for each territory as a whole percent, rounded to two decimal places, if required.

Coast to Coast Surfboards Inc.
Contribution Margin by Territory
	East Coast	West Coast
	$	$
	$	$
	$	$
Contribution margin ratio	%	%

b. What advice would you give to the management of Coast to Coast Surfboards regarding the relative profitability of the two territories?

The total contribution margin is   for the East Coast, while the contribution margin ratio is   for West Coast. This is because East Coast sells only Atlantic Wave, which have a   contribution margin ratio but a   contribution margin per unit. In attempting to improve the company’s profitability, it is   that changing the mix of products to the two territories will have much effect. In addition, the variable selling expenses per unit for the   may be too high.

Answer 1

Coast to Coast Surfboards Inc. Contribution Margin by Territo t Coast Sales 1,359,000 Less: Variable Expense 1,114,380 Contribution Margin 244,620 Contribution Margin Ratio (%) West Coast 1,283,500 1,004,150 279.350 Calculation: East Coast: Sales = 3,020 * $450 = $1,359,000 Variable Expense= 3,020 * ($167 + $202) = $1,114,380 West Coast: Sales = (1,510 * $450) + (1,510 * $400) = $1,283,500 Variable Expense = 1,510 ($167 + $202) + 1,510 ($192 + $104) = $1,004,150

Answer to Part 2.

The total contribution margin is low for the East Coast, while the contribution margin ratio is high for West Coast. This is because East Coast sells only Atlantic Wave, which have a low contribution margin ratio but a low contribution margin per unit. In attempting to improve the company’s profitability, it is better that changing the mix of products to the two territories will have much effect. In addition, the variable selling expenses per unit for the   may be too high.