Territory and Product Profitability Analysis

Pipeline Surfboards Inc. manufactures and sells two styles of surfboards, Atlantic Wave and Pacific Pounder. These surfboards are sold in two regions, East Coast and West Coast. Information about the two surfboards is as follows:

Line Item Description	Atlantic Wave	Pacific Pounder
Sales price	$450	$350
Variable cost of goods sold per unit	(167)	(165)
Manufacturing margin per unit	$283	$185
Variable selling expense per unit	(193)	(94)
Contribution margin per unit	$90	$91

The sales unit volume for the sales territories and products for the period is as follows:

Product	East Coast	West Coast
Atlantic Wave	2,780	1,390
Pacific Pounder	0	1,390

Question Content Area

a. Prepare a contribution margin by sales territory report. Compute the contribution margin ratio for each territory. Round contribution margin ratio answers to two decimal places.

Line Item Description	East Coast	West Coast
Contribution marginManufacturing marginSalesVariable cost of goods soldVariable selling expensesSales	$Sales	$Sales
Contribution marginManufacturing marginSalesVariable cost of goods soldVariable selling expensesVariable cost of goods sold	Variable cost of goods sold	Variable cost of goods sold
Contribution marginManufacturing marginSalesVariable cost of goods soldVariable selling expensesManufacturing margin	$Manufacturing margin	$Manufacturing margin
Contribution marginManufacturing marginSalesVariable cost of goods soldVariable selling expensesVariable selling expenses	Variable selling expenses	Variable selling expenses
Contribution marginManufacturing marginSalesVariable cost of goods soldVariable selling expensesContribution margin	$Contribution margin	$Contribution margin
Contribution margin ratio	Contribution margin ratio%	Contribution margin ratio%

Feedback Area

Feedback

a. To recast the contribution margin data by sales territory 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 Pipeline Surfboards regarding the relative profitability of the two territories? The total contribution margin is fill in the blank 1 of 5

slightly higherslightly lowerslightly lower

for the East Coast, while the contribution margin ratio is fill in the blank 2 of 5

slightly higherslightly lowerslightly higher

for West Coast. This is because East Coast sells only Atlantic Wave, which have a fill in the blank 3 of 5

higherlowerlower

contribution margin per unit. In attempting to improve the companys profitability, it is fill in the blank 4 of 5

likelyunlikelyunlikely

that changing the mix of products to the two territories will have much effect. In addition, the variable selling expenses per unit for the fill in the blank 5 of 5

Atlantic WavePacific PounderAtlantic Wave

may be too high.