Question

5. Product Profitability Analysis

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

	Conquistador		Hurricane
Sales price	$6,400		$4,200
Variable cost of goods sold	(4,030)		(2,810)
Manufacturing margin	$2,370		$1,390
Variable selling expenses	(1,026)		(676)
Contribution margin	$1,344		$714
Fixed expenses	(630)		(290)
Operating income	$714		$424

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

	Conquistador		Hurricane
Sales unit volume	2,800		2,100

a. Prepare a contribution margin by product report. Compute the contribution margin ratio for each product as a whole percent.

b. What advice would you give to the management of Galaxy Sports Inc. regarding the profitability of the two products?

The __________ line provides the largest total contribution margin and the largest contribution margin ratio. If the sales mix were shifted more toward the __________ line, the overall profitability of the company would increase.

Answer 1

Answer b)

Contribution margin statement

Particulars	Conqulstador	Hurricane
Sales Price (a)	$ 6,400	$ 4,200
Less: Variable Costs
Variable Cost of goods sold	$ 4,030	$ 2,810
Variable selling expenses	$ 1,026	$ 6,76
Total Variable Cost (b)	$ 5,056	$ 3,486
Contribution margin (a) - (b)	$ 1,344	$ 7,14
Less: Fixed Expenses	$ 630	$ 290
Net Income	$ 714	$ 424

Calculation of Contribution Margin Ratio

Contribution margin ratio = Contribution margin/Sales Price

Conqulstador:

Contribution margin ratio = $ 1,344/$ 6,400

                                               = 0.21 or 21%

Therefore the contribution margin ratio of Conqulstador is 21%

Hurricane:

Contribution margin ratio = $ 714/$ 4,200

                                               = 0.17 or 17%

Therefore the contribution margin ratio of Hurricane is 17%

Answer b)

Contribution margin ratio: it is a measure of profitability of a product and provides information pertinent to the percentage of contribution on sales of the company. Higher the contribution -margin, better will be the cushion provided by the product to the company to cover fixed expenses and administrative costs.

In the given question, the Conqulstador line provides the largest total contribution margin (i.e. $ 1,344) and the largest contribution margin ratio (i.e. 21%). If sales mix were shifted towards the Conqulstador line, the overall profitability of the company would increase.