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:

Amount Descriptions
Contribution margin
Contribution margin ratio
Cost of goods sold
Fixed expenses
Gross profit
Manufacturing margin
Revenues
Variable cost of goods sold
Variable selling expenses

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?

Answer 1

a)

Particulars	Mountain monster	desert dragon
Sales revenue	$24,960,000 (4,800×$5,200)	$24,645,000 (4,650×$5300)
Less: Variable cost of goods sold	($15,552,000) (4800×$3240)	($16,042,500) (4650×$3450)
Manufacturing margin	$9,408,000	$8,602,500
Less: Variable selling expenses	($3,417,600) ($712×4800)	($5,152,200) (4650×$1108)
Contribution margin	$5,990,400	$3,450,300
Less: Fixed expenses	($2,256,000) (4800×$470)	($1,488,000) (4650×$320)
Income from operations	$3,734,400	$1,962,300
Contribution margin ratio (Contribution margin/sales revenue)	24% ($5,990,400/$24,960,000)	14% ($3,450,300/$24,645,000)
Net income percentage (Net income/sales revenue)	14.96% ($3,734,400/$24,960,000)	7.96% ($1,962,300/$24,645,000)

b) in relative profitability, the profit percentage of "mountain monster" is greater than "desert dragon".

Management should focus on selling more quantity of mountain monster as it has higher contribution margin and net income percentage.