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 $4,200 Variable cost of goods sold(4,030) (2,810) Manufacturing margin$2,370 $1,390 Variable selling expenses(1,090) (634) Contribution margin$1,280 $756 Fixed expenses(600) (300) Operating income$680 $456

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

ConquistadorHurricaneSales unit volume3,500 2,500

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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 profitSalesSales$Sales$SalesFixed cost of goods soldFixed selling expensesManufacturing marginSalesVariable cost of goods soldVariable cost of goods soldVariable cost of goods soldVariable cost of goods soldContribution marginCost of goods soldFixed manufacturing costsGross profitManufacturing marginManufacturing margin$Manufacturing margin$Manufacturing marginFixed cost of goods soldFixed selling expensesManufacturing marginSalesVariable selling expensesVariable selling expensesVariable selling expensesVariable selling expensesContribution marginCost of goods manufacturedFixed manufacturing costsFixed salesManufacturing marginContribution margin$Contribution margin$Contribution marginContribution margin ratioFixed manufacturing costsFixed salesManufacturing marginVariable cost of goods soldContribution margin ratioContribution 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.

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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.

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