Question

I am struggling with figureing this out as a practicing question! Please show me the work for how to get the correct answers!

ABC Company produces two separate products, product A and product B.  Information on product A and B is reported below:

Product A                                Product B

Sales Price:                  $1,000                                     $1,800

Direct Materials          $100                                        $500

Direct Labor                $250                                        $600

Variable Overhead      $50                                          $400

Commissions:             $25                                          $40

Company information:

Fixed Manufacturing overhead:          $400,000 per year

Fixed Administrative Expenses:          $375,000 per year

Tax rate:                                              25%

ABC Company has to decide which of the following sales mixes will generate the best overall results for the company:

Option 1:  Sell 5,000 units of Product A and 2,000 units of Product B

Option 2:  Sell 3,000 units of Product A and 4,000 units of Product B

Which option would you recommend to ABC Company and why?  Based off of what you know about CVP now, why do you think that the numbers worked out the way that they did?

Answer 1

Let us use Conttribution margin method to decide the best alternative mix for the company
Contri bution = Sales -Variable Expenses
Particulars		Product A		Product B
Selling Price Per Unit		1000		1800
Less Variable Expenses
Direct Materials	100		500
Direct Labour	250		600
Variable Overhead	50		400
Commissions	25	425	40	1540
Contribution Per Unit		575		260
Option 1		No. Of Units		Contribution/ Unit	Contribution
Product A		5000		575	2875000
Product B		2000		260	520000
					3395000
Option 2		No. Of Units		Contribution/ Unit	Contribution
Product A		3000		575	1725000
Product B		4000		260	1040000
					2765000
I recommend the Option 1 as that product mix makes higher contribution for the company
As the Fixed cost for both products stands the same the higher contribution generating unit will produce best results for the company