PowerTrain Sports Inc. manufactures and sells two styles of All Terrain Vehicles (ATVs), the Mountain Monster and Desert Dragon, from a single manufacturing facility. The manufacturing facility operates at 100% of capacity. The following per-unit information is available for the two products:
|
1 |
Mountain Monster |
Desert Dragon |
|
|
2 |
Sales price |
$5,400.00 |
$5,325.00 |
|
3 |
Variable cost of goods sold |
3,275.00 |
3,200.00 |
|
4 |
Manufacturing margin |
$2,125.00 |
$2,125.00 |
|
5 |
Variable selling expenses |
937.00 |
1,273.00 |
|
6 |
Contribution margin |
$1,188.00 |
$852.00 |
|
7 |
Fixed expenses |
475.00 |
310.00 |
|
8 |
Income from operations |
$713.00 |
$542.00 |
In addition, the following sales unit volume information for the period is as follows:
|
Mountain Monster |
Desert Dragon |
|
| Sales unit volume | 5,400 | 5,250 |
Required:
| a. | Prepare a contribution margin by product report. Calculate the contribution margin ratio for each. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. |
| b. | What advice would you give to the management of PowerTrain Sports Inc. regarding the relative profitability of the two products? |
A)
| Particulars | MM | DD |
| Revenue (a) | $29160000 | $27956250 |
| Less - variable cost of goods sold | $17685000 | $16800000 |
| Manufacturing margin | $11475000 | $11156250 |
| Less - variable selling expense | $5059800 | $6683250 |
| Contribution margin (b) | $6415200 | $4473000 |
| Contribution ratio (b/a*100) | 22% |
16% |
B) since both the product's manufacturing margin is same , the difference in profitability is due to sales expense.
Although sales expense is more in desert dragon , it's sales are less than mountain monster. So overall mountain monster is more profitable.
Management should try to reduce sales expense on desert dragon and can increase sales expense in mountain monster.
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