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 | $6,600 | $4,000 | ||
| Variable cost of goods sold | 4,160 | 2,680 | ||
| Manufacturing margin | $2,440 | $1,320 | ||
| Variable selling expenses | 1,186 | 560 | ||
| Contribution margin | $1,254 | $760 | ||
| Fixed expenses | 590 | 300 | ||
| Income from operations | $664 | $460 | ||
In addition, the following sales unit volume information for the period is as follows:
| Mountain Monster | Desert Dragon | |||
| Sales unit volume | 3,100 | 2,300 | ||
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 | |
| Revenues | $ | $ |
| Variable cost of goods sold | ||
| Manufacturing margin | $ | $ |
| Variable selling expenses | ||
| Contribution margin | $ | $ |
| Contribution margin ratio | % | % |
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b. What advice would you give to the management of PowerTrain Sports Inc. regarding the relative profitability of the two products?
The Desert Dragon line provides the largest total contribution margin and the largest contribution margin ratio. If the sales mix were shifted more toward the Desert Dragon line, the overall profitability of the company would increase.
| PowerTrain Sports Inc. | ||
| Contribution Margin by Product | ||
| Mountain Monster | Desert Dragon | |
| Revenues | $20,460,000 | $9,200,000 |
| Variable cost of goods sold | $12,896,000 | $6,164,000 |
| Manufacturing margin | $7,564,000 | $3,036,000 |
| Variable selling expenses | $3,676,600 | $1,288,000 |
| Contribution margin | $3,887,400 | $1,748,000 |
| Contribution margin ratio | 19.00% | 19.00% |
| b. | ||
| Mountain Monster line | ||
| provides the largest total contribution margin | ||
| CM Ratio is same | ||
| If shifted to Desert Dragon, the overall profitability would decrease as Contribution Margin per unit is lower | ||
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