Accounting Assignment Help With Sales Mix Decision

In marginal costing, profit is calculated by subtracting fixed cost from contribution. It means management should try to maximise the contribution. When a business firm produces variety of product lines, then problem of best sales mix arises. The best sales mix is that which yields the maximum contribution. The products which give the maximum contribution are to be retained and their production should be increased keeping in view the demand. The products, which yield less contribution, should be reduced or closed down depending upon the situation.

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Example:

State which of the following sales mix you would recommend to the management?

Elements of cost X($) Y($)

Sale Price 200 150

Direct Material 100 80

Direct Labour 40 30

Variable Overheads 20 20

Fixed Overheads $ 100000

Alternative Sales Mix :

a) 2000 units of X and 2000 units of Y

b) 3000 units of X and 1000 units of Y

c) 4000 units of X and Nil units of Y

Solution:

Products X($) Y($)

Sale Price 200 150

Direct Material 100 80

Direct Labour 40 30

Variable Overheads 20 20

Contribution per unit 40 20

Choice of Sales Mix :

Sales Mix (1) : Contribution on $

2000 units of X @ $ 40 per units 80000

2000 units of Y @ $ 20 per units 40000

Total Contribution = 120000

Sales Mix (2) : Contribution on $

3000 units of X @ $ 40 per unit 120000

1000 units of Y @ $ 20 per unit 20000

Total Contribution = 140000

Sales Mix (3) : Contribution on $

4000 units of X @ $ 4 0 per unit = 160000

Sales mix 3 gives the highest contribution and is the best mix among the above alternatives.

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