Question

Territory and Product Profitability Analysis

Coast to Coast 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:

	Atlantic Wave		Pacific Pounder
Sales price	$200		$100
Variable cost of goods sold per unit	74		48
Manufacturing margin per unit	$126		$52
Variable selling expense per unit	70		26
Contribution margin per unit	$56		$26

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

	East Coast		West Coast
Atlantic Wave	3,200		1,600
Pacific Pounder	0		1,600

a. Prepare a contribution margin by sales territory report. Calculate the contribution margin ratio for each territory as a whole percent, rounded to two decimal places, if required.

Coast to Coast Surfboards Inc.
Contribution Margin by Territory
	East Coast	West Coast
	$	$
	$	$
	$	$
Contribution margin ratio	%	%

b. What advice would you give to the management of Coast to Coast Surfboards regarding the relative profitability of the two territories?

The total contribution margin is for the East Coast, while the contribution margin ratio is for West Coast. This is because East Coast sells only Atlantic Waves, which have a contribution margin ratio but a contribution margin per unit. In attempting to improve the company’s profitability, it is that changing the mix of products to the two territories will have much effect. In addition, the variable selling expenses per unit for the may be too high.

Answer 1

Solution a:

Coast to Coast Surfboards Inc.
Contribution Margin by Territory
Particulars	East Coast	West Coast
Sales	$640,000.00	$480,000.00
Variable cost of goods sold	$236,800.00	$195,200.00
Variable selling expenses	$224,000.00	$153,600.00
Contribution margin	$179,200.00	$131,200.00
Contribution margin ratio	28.00%	27.33%

Solution b:

The total contribution margin is higher for the East Coast, while the contribution margin ratio is lower for West Coast. This is because East Coast sells only Atlantic Waves, which have a higher contribution margin ratio but a higher contribution margin per unit. In attempting to improve the company’s profitability, it is that changing the mix of products to the two territories will have much effect. In addition, the variable selling expenses per unit for the Atlantic Wave may be too high.