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Unit V: Sales Mix Decision

The document discusses how a company, ABC Ltd, produces two products, Product A and Product B, and needs to determine the optimal sales mix to maximize profits. Four alternative sales mix options are provided involving different production unit levels of Products A and B. After calculating the contribution margin per unit for each product and determining the profit levels of the four mixes, the solution recommends mix 4 (150 units of Product A and 350 units of Product B) as it generates the highest profit of ₹1,900.

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212 views

Unit V: Sales Mix Decision

The document discusses how a company, ABC Ltd, produces two products, Product A and Product B, and needs to determine the optimal sales mix to maximize profits. Four alternative sales mix options are provided involving different production unit levels of Products A and B. After calculating the contribution margin per unit for each product and determining the profit levels of the four mixes, the solution recommends mix 4 (150 units of Product A and 350 units of Product B) as it generates the highest profit of ₹1,900.

Uploaded by

Anon
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Unit V

Sales Mix Decision


Most of the companies produce multiple products. In such cases, they need to take decisions
regarding the quantities of the various products to be produced and sold. Such decisions are
again taken using CVP analysis and marginal costing techniques. For example, Apple may need
to take decision about the number of units to be produced of their iPhone and their MacBook
laptops. Following illustration clears this point.

Example

ABC Ltd. has provided you following data with regard to their product line. The company
produces two products Product A and Product B and needs to decide proper sales mix.

Direct materials A ` 16
Direct Materials B ` 12
Direct wages A 24 Hrs at 50 paise per hour
Direct wages B 16 Hrs at 50 paise per hour
Variable overheads 150% of wages
Fixed overheads ` 1,500
Selling price A ` 50
Selling price B ` 40

The directors want to be acquainted with the desirability of adopting any one of the following
alternative sales mixes in the budget for the next period:

1. 250 units of A and 250 units of B

2. 400 units of B only

3. 400 units of A and 100 units of B

4. 150 units of A and 350 units of B

State which of the alternative sales mixes you would recommend to the management?
Solution:

The first step is to determine the contribution margin per unit of A and B
The determination of the contribution of product A and B are through the preparation of
Marginal costing statement.

Notes

Particulars Product A (`) Product B (`)


Selling price 50 40
Less: Direct Materials 16 12
Direct wages 12 8
Variable overheads 18 12
Variable cost 46 (16+12+18) 32 (12+8+12)
Contribution 4 (50 – 46) 8 (40 – 32)

The next step is to determine the profit level of every mix.

1. 250 units of A and 250 units of B.

The first step is to determine the total contribution of the mix. The main reason is to
determine the profit level of the mix through the deduction of the
fixed overheads
`
Product of A 250 units × 4 1,000
Product of B 250 units × 8 2,000

Contribution 3,000
Fixed overheads 1,500

Profit 1,500

2. 400 units of B only

Product B Contribution 400 units × ` 8 3,200

Fixed overheads 1,500

Profit 1,700

3. 400 units of A and 100 units of B

Product of A 400 units × ` 4 1,600


Product of B 100 units × ` 8 800
Contribution 2,400
Fixed overheads 1,500

Profit 900

4. 150 units of A and 350 units of B

Product A 150 units × ` 4 = 600


Product B 350 units × ` 8 2,800

Contribution 3,400
Fixed overheads 1,500

Profit 1,900

Mix 1 2 3 4
Contribution ` 1,500 1,700 900 1,900

The profit level among the given various mixes, the mix (d) is able to generate highest volume of
profit over the others.

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