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	$6,800		$4,200
Variable cost of goods sold	(4,280)		(2,810)
Manufacturing margin	$2,520		$1,390
Variable selling expenses	(1,024)		(550)
Contribution margin	$1,496		$840
Fixed expenses	(700)		(340)
Operating income	$796		$500

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

	Conquistador	Hurricane
Sales unit volume	3,400		2,600

Question Content Area

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

	Conquistador	Hurricane
Contribution marginCost of goods soldDirect laborGross profitSalesSales	$Sales	$Sales
Fixed cost of goods soldFixed selling expensesManufacturing marginSalesVariable cost of goods soldVariable cost of goods sold	Variable cost of goods sold	Variable cost of goods sold
Contribution marginCost of goods soldFixed manufacturing costsGross profitManufacturing marginManufacturing margin	$Manufacturing margin	$Manufacturing margin
Fixed cost of goods soldFixed selling expensesManufacturing marginSalesVariable selling expensesVariable selling expenses	Variable selling expenses	Variable selling expenses
Contribution marginCost of goods manufacturedFixed manufacturing costsFixed salesManufacturing marginContribution margin	$Contribution margin	$Contribution margin
Contribution margin ratioFixed manufacturing costsFixed salesManufacturing marginVariable cost of goods soldContribution margin ratio	Contribution margin ratio%	Contribution margin ratio%

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To recast the contribution margin data by product report, multiply the sales volume by each per unit amount. To calculate the contribution margin ratio, divide the contribution margin by sales.

Question Content Area

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

The

ConquistadorHurricaneConquistador

line provides the largest total contribution margin and the largest contribution margin ratio. If the sales mix were shifted more toward the

ConquistadorHurricaneConquistador

line, the overall profitability of the company would increase.