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:

Conquistador Hurricane
Sales price $6,000 $11,500
Variable cost of goods sold (3600) (5750)
Manufacturing margin $2400 $5750
Variable selling expenses (900) (1150)
Contribution margin $1500 $4600
Fixed (750) (1000)
Operating income $750 $3600

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

Conquistador Hurricane
Sales unit volume 10,000 4,000

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

              Galaxy Sports Inc Contribution Margin Report

Contribution margin is difference between the company's total sales and the variable cost. These two measures are dependent on the level of activities the company decides to operate at for both styles of vehicles.

The analysis below shows the contribution margin for the two products of the company.

                                                    Amount in $'000       Amount in $'000

Product                                          Conquistador              Hurricane

Sales price                                           60,000                   46,000

Total variable costs

Variable cost of goods sold               (36,000)                 (23,000)

Variable selling expenses                  (9,000)                   (4600)

Total Contribution margin                   15,000                     18,400

Contribution margin ratio                      0.25                         0.4

Number of units                                    10,000                     4,000

Contribution margin per unit                 $1.50                      $4.60

Based on the total contribution, Conquistador has a greater contribution than Hurricane. However, a further review of the Contribution margin ratio and contribution margin per unit shows that the contribution margin per unit of Hurricane is more than thrice the contribution margin per unit of Conquistador. Hence the company show reduce the volume of production for Conquistador and increase that of Hurricane as Hurricane is more profitable for the company.

Explanation:

The sales less the variable cost gives the contribution margin. The contribution margin less the fixed cost gives the net operating income.

Contribution margin ratio is the contribution margin divided by the sales. Total sales is the unit sales price multiplied by the volume.

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