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	$223		$158
Variable cost of goods sold per unit	88		88
Manufacturing margin per unit	$135		$70
Variable selling expense per unit	120		60
Contribution margin per unit	$15		$10

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

	East Coast		West Coast
Atlantic Wave	30,000		20,000
Pacific Pounder	0		20,000

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
Sales	$	$
Variable cost of goods sold
Manufacturing margin	$	$
Variable selling expenses
Contribution margin	$	$
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 East Coast's total contribution margin is lower and the contribution margin ratio is higher when compared to the West Coast. This, in part, is explained by the single board style for the East Coast as compared to the two styles available in the West Coast. Taking a closer look, the Atlantic Wave's manufacturing margin per unitis $ while the Pacific Pounder's is $. And the Atlantic Wave's variable selling expense per unit is $ while the Pacific Pounder's is $.

With an eye on improving profitability, modifying the product mix within the two territories would be ineffective . Additionally, the company should review the variable costs . The variable cost of goods sold could shed light on manufacturing inefficiencies. Also, a review of Atlantic Wave's variable selling expense per unit could also help with profitability.

Answer 1

a . Contribution margin and contribution margin ratio for each territory is as follows

Coast to coast	surfboards	Inc.
Contribution	margin by	territory
	East coast	west coast
Sales	6690000 (30000x223)	7620000
Variable cost of goods sold	2640000 (30000x88)	3520000 (40000x88)
Manufacturing margin	4050000	4100000
Variable selling exp	3600000	3600000
Contribution margin	450000	500000
Contribution margin ratio	6.73% (450000/6690000)x100	6.56% [(500000/7620000)x100]

B . The completed advice to the management of coast to coast surfboards regarding profitability regarding two territories will be as follows :-

The East coast's total contribution margin is lower and the contribution margin ratio is higher when compared to West coast. This in part is explained by the single board style for the east coast as compared to the two styles available in the West coast. Taking the closer look, the Atlantic waves manufacturing margin per unit is $135 while the pacific Pacific pounders is the $70. And the Atlantic waves variable selling exp per unit is $120 while the Pacific pounder is $60. With an eye on improving profitability modifying the product mix within the two territories would be ineffective. Additionally company should review the variable cost. The variable cost of goods sold could shed light on manufacturing inefficiencies. Also a review of atlantic waves variable selling expense per unit could also help with profitability.