Question

PowerTrain Sports Inc. manufactures and sells two styles of All Terrain Vehicles (ATVs), the Mountain Monster and Desert Dragon, from a single manufacturing facility. The manufacturing facility operates at 100% of capacity. The following per-unit information is available for the two products:

1		Mountain Monster	Desert Dragon
2	Sales price	$5,200.00	$5,300.00
3	Variable cost of goods sold	3,240.00	3,450.00
4	Manufacturing margin	$1,960.00	$1,850.00
5	Variable selling expenses	712.00	1,108.00
6	Contribution margin	$1,248.00	$742.00
7	Fixed expenses	470.00	320.00
8	Income from operations	$778.00	$422.00

In addition, the following sales unit volume information for the period is as follows:

	Mountain Monster	Desert Dragon
Sales unit volume	4,800	4,650

Required:

a.	Prepare a contribution margin by product report. Calculate the contribution margin ratio for each. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries.
b.	What advice would you give to the management of PowerTrain Sports Inc. regarding the relative profitability of the two products?

a. Prepare a contribution margin by product report. Calculate the contribution margin ratio for each. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries.

Score: 30/78

PowerTrain Sports Inc.

Contribution Margin by Product

1		Mountain Monster	Desert Dragon
2	✔
3	✔
4	✔
5	✔
6	✔
7	✔

Answer 1

a)

PowerTrain Sports Inc.
Contribution Margin by Product
1		Mountain Monster	Desert Dragon
2	Revenues	$5,200.00	$5,300.00
3	Variable cost of goods sold	3,240.00	3,450.00
4	Manufacturing margin	$1,960.00	$1,850.00
5	Variable selling expenses	712.00	1,108.00
6	Contribution margin	$1,248.00	$742.00
7	Contribution margin ratio	24%	14%

Note 1 : calculation of Contribution margin ratio-

Contribution margin ratio = Contribution margin per unit / selling price per unit

Contribution margin ratio of Mountain Monster = $1248/$5200

Contribution margin ratio of Mountain Monster = 0.24

That means 24%

Contribution margin ratio of Desert Dragon = $742/$5300

Contribution margin ratio of Desert Dragon = 0.14

That means 14%

b)

The Mountain Monster line provides largest contribution margin and largest contribution margin ratio, If the sales mix is shifted more towards the Mountain Monster line, the overall profitability of the company would increase.

As Mountain Monster line gives more contribution returns, more units of sale of Mountain Monster provides more contribution margin amount which in turn helps to earn more net profit.