Question

Product Profitability Analysis

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:

	Mountain Monster		Desert Dragon
Sales price	$5,800		$3,400
Variable cost of goods sold	3,650		2,280
Manufacturing margin	$2,150		$1,120
Variable selling expenses	1,338		338
Contribution margin	$812		$782
Fixed expenses	380		310
Income from operations	$432		$472

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

	Mountain Monster		Desert Dragon
Sales unit volume	3,500		2,600

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

PowerTrain Sports Inc.
Contribution Margin by Product
	Mountain Monster	Desert Dragon
	$	$
	$	$
	$	$
	%	%

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

The line provides the largest total contribution margin and the largest contribution margin ratio. If the sales mix were shifted more toward the line, the overall profitability of the company would increase.

Answer 1

Solution a:

PowerTrain Sports Inc.
Contribution Margin by Product
	Mountain Monster	Desert Dragon
Sales Revenue (Units*Price)	$2,03,00,000	$88,40,000
Variable cost of goods sold (Units*Cost per unit)	$1,27,75,000	$59,28,000
Manufacturing Margin	$75,25,000	$29,12,000
Variable selling Expenses (Units*Cost per unit)	$46,83,000	$8,78,800
Contribution margin	$28,42,000	$20,33,200
Contribution margin ratio (Contr. Margin/ Sales)	14%	23%

Solution b:

The Mountain Monster line provides the largest total contribution margin and the Desert Dragon largest contribution margin ratio. If the sales mix were shifted more toward the Desert Dragon line, the overall profitability of the company would increase.