Question

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 $5,400.00 $5,250.00
Variable cost of goods sold 3,285.00 3,400.00
Manufacturing margin $2,115.00 $1,850.00
Variable selling expenses 1,035.00 905
Contribution margin $1,080.00 $945.00
Fixed expenses 485 310
Income from operations $595.00 $635.00

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

Mountain Monster Desert Dragon
Sales unit volume 5,000 4,850

Required:
a. Prepare a contribution margin by product report. Calculate the contribution margin ratio for each.
b. What advice would you give to the management of PowerTrain Sports Inc. regarding the relative profitability of the two products?

Answer 1

Answer: See explanation

Step-by-step explanation:

a. The contribution margin ratio for Mountain Monster will be:

Revenue = 5400 × 5000 = 27000000

Variable cost of goods sold = 3285 × 5000 = 16425000

Manufacturing margin = 2115 × 5000 = 10575000

Variable selling expense = 1035 × 5000 = 5175000

Contribution margin = 1080 × 5000 = 5400000

Contribution margin ratio = Contribution margin / Revenue = 5400000/27000000 = 0.2 = 20%

The contribution margin ratio for Desert Dragon will be:

Revenue = 5250 × 4850 = 25462500

Variable cost of goods sold = 3400 × 4850 = 16490000

Manufacturing margin = 1850 × 4850 = 8972500

Variable selling expense = 905 × 4850 = 4389250

Contribution margin = 945 × 4850 = 4583250

Contribution margin ratio = Contribution margin / Revenue = 4583250/25462500 = 0.18 = 18%

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

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