Question

Product Profitability Analysis

Galaxy Sports Inc. manufactures and sells two styles of All Terrain Vehicles (ATVs), the Conquistador and Hurricane, from a single manufacturing facility. The manufacturing facility operates at 100% of capacity. The following per-unit information is available for the two products:

Line Item Description Conquistador Hurricane
Sales price $5,000 $3,200
Variable cost of goods sold (3,150) (2,140)
Manufacturing margin $1,850 $1,060
Variable selling expenses (950) (548)
Contribution margin $900 $512
Fixed expenses (420) (200)
Operating income $480 $312
In addition, the following sales unit volume information for the period is as follows:

Line Item Description Conquistador Hurricane
Sales unit volume 2,400 1,800

Question Content Area
a. Prepare a contribution margin by product report. Compute the contribution margin ratio for each product as a whole percent.

Galaxy Sports Inc.
Contribution Margin by Product
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Line Item Description Conquistador Hurricane

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Question Content Area
b. What advice would you give to the management of Galaxy Sports Inc. regarding the profitability of the two products?
The fill in the blank 1 of 2
line provides the largest total contribution margin and the largest contribution margin ratio. If the sales mix were shifted more toward the fill in the blank 2 of 2
line, the overall profitability of the company would increase.

Answer 1

### a. Contribution Margin by Product Report

**Galaxy Sports Inc.**
**Contribution Margin by Product**

| Line Item Description | Conquistador | Hurricane |
|--------------------------------------|----------------|---------------|
| Sales Price | $5,000 | $3,200 |
| Variable Cost of Goods Sold | $(3,150) | $(2,140) |
| **Manufacturing Margin** | $1,850 | $1,060 |
| Variable Selling Expenses | $(950) | $(548) |
| **Contribution Margin** | $900 | $512 |
| Fixed Expenses | $(420) | $(200) |
| **Operating Income** | $480 | $312 |

### Contribution Margin Ratio Calculation

- **Contribution Margin Ratio**:
- Conquistador:
\[
\text{Contribution Margin Ratio} = \left( \frac{\text{Contribution Margin}}{\text{Sales Price}} \right) \times 100
\]
\[
\text{CM Ratio for Conquistador} = \left( \frac{900}{5000} \right) \times 100 = 18\%
\]

- Hurricane:
\[
\text{CM Ratio for Hurricane} = \left( \frac{512}{3200} \right) \times 100 = 16\%
\]

### Contribution Margin Ratio Summary

| Product | Contribution Margin Ratio |
|------------------|---------------------------|
| Conquistador | 18% |
| Hurricane | 16% |

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### b. Advice to the Management of Galaxy Sports Inc.

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

By focusing on producing and marketing the Conquistador model more effectively, Galaxy Sports Inc. can enhance overall profitability given its higher contribution per unit.