Page 244 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 12: Decisions Involving Alternative Choices

The directors want to be acquainted with the desirability of adopting any one of the following Notes
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.
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 32
Contribution 4 8
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. Why the total contribution
has to be found out?

The main reason is to determine the profit level of the mix through the deduction of the
fi xed overheads
(`)
Product of A 250 units × 4 1,000
Product of B 250 units × 8 2,000
Contribution 3,000
Fixed overheads 1,500
Profi t 1,500

2. 400 units of B only
Product B Contribution 400 units × ` 8 3,200
Fixed overheads 1,500
Profi t 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
Profi t 900

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