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:

ConquistadorHurricaneSales price$6,400 $4,000 Variable cost of goods sold(4,030) (2,680) Manufacturing margin$2,370 $1,320 Variable selling expenses(1,026) (760) Contribution margin$1,344 $560 Fixed expenses(630) (220) Operating income$714 $340

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

ConquistadorHurricaneSales unit volume2,100 1,600

Question Content Area

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

ConquistadorHurricaneContribution marginCost of goods soldDirect laborGross profitSales$- Select -$- Select -Fixed cost of goods soldFixed selling expensesManufacturing marginSalesVariable cost of goods sold- Select -- Select -Contribution marginCost of goods soldFixed manufacturing costsGross profitManufacturing margin$- Select -$- Select -Fixed cost of goods soldFixed selling expensesManufacturing marginSalesVariable selling expenses- Select -- Select -Contribution marginCost of goods manufacturedFixed manufacturing costsFixed salesManufacturing margin$- Select -$- Select -Contribution margin ratioFixed manufacturing costsFixed salesManufacturing marginVariable cost of goods sold- Select -%- Select -%

Question Content Area

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

The

ConquistadorHurricane

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

ConquistadorHurricane

line, the overall profitability of the company would increase.