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Accounting For Managers - Management Accounting-Marginal Costing

Suitable Product Mix/Sales Mix-Application Of Marginal Costing

   Posted On :  03.05.2018 06:51 am

Normally, a business concern will select the product mix which gives the maximum profit. Product mix is the ratio in which various products are produced and sold.

Suitable Product Mix/Sales Mix
 
 
Normally, a business concern will select the product mix which gives the maximum profit. Product mix is the ratio in which various products are produced and sold. The marginal costing technique helps management in taking appropriate decisions regarding the product mix, i.e., in changing the ratio of product mix so as to maximise profits. The technique not only helps in dropping unprofitable products from the mix but also helps in dropping unprofitable departments, activities etc. Consider the following illustrations:
 
Illustration 10: (Product Mix)
 
 
The following figures are obtained from the accounts of a departmental store having four departments.
On the above basis, it is decided to close down dept. B immediately, as the loss shown is the maximum. After that dept. A will be discarded. What is your advice to the management?


Commentary:
 
 
From the above, it is clear that the contribution of dept. A is negative and should be discarded immediately. As dept. B provides rs.2,000 towards fixed costs and profits, it should not be discarded.
 
Illustration 11 (Sales Mix):
 
 
Present the following information to show to the management:
 
(a)    the marginal product cost and the contribution per unit; (b) the total contribution and profits resulting from each of the following mixtures:

 Sales Mixtures:

1000 Units Of Product A And 2000 Units Of B
 
1500 Units Of Product A And 1500 Units Of B
 
2000 Units Of Product A And 1000 Units Of B

Therefore sales mixture (iii) will give the highest profit; and as such, mixture (iii) can be adopted.

 

Tags : Accounting For Managers - Management Accounting-Marginal Costing
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