In this video on short-term business decision-making we're gonna be
specifically looking at an example of product mix and emphasizing one product
over another. But before we get started I'd like to remind everyone that our
lecture notes are available on my website at theaccountingdr.com. I
hope you'll visit my website. Check out other videos that I have as well as
ebooks and I have a textbook store as well as my blog there. Okay so let's get
started on our example. Here we have Vivace. They sell both designer and
moderately priced fashion accessories so we have more than one product so we have
a product mix. Top management is deciding which product line to emphasize.
Accountants have provided the following data. So we have our sales price, our
variable expenses, our contribution margin, our fixed expenses which are
allocated based on some estimated rate that we've calculated in the past and
average operating income for both product types we have. The Vivace store
in Reno Nevada has 10,000 square feet of floor space. Automatically we know now we
have a constrained resource. If Vivace emphasized moderately priced goods it
can display 650 items in the store. If Vivace emphasized designer-wear it can
only display 300 designer items. These numbers are also the average monthly
sales and units so no matter which one we emphasize we are gonna sell those.
That's what that last line means to us. So let's restate something we should
already know at this point. We need to emphasize the product with the highest
contribution margin per unit of the constrained resource. So we now know that
our constrained resource is square feet- square feet of storage or floor space. It
may be storage space, it may be shelf space. Whatever the case may be you need
to emphasize the product that has the highest contribution margin per unit of
whatever the constrained resource is. So let's set up an analysis here.
So if you're following along with the notes that you can get from my website
here we have the designer and the moderately-priced. We know that we can
display 300 designer per 10,000 square feet which is 0.03 units per square foot.
We can display 650 moderately priced units in 10,000 square feet or
0.65 units per square foot. If you multiply those percentages by the
contribution margin of each one per unit you get a contribution margin per square
foot or per constrained resource for the designer of $3.00 and for the
moderately priced of almost $4.00- $3.965
cent. We could really stop here because we already know which item we should
emphasize- the one with the highest contribution margin per constrained
resource. We know it's the moderately priced but if we go forward with this
analysis and multiply it times the square feet we find that the total
amount of designer that we can emphasize will bring in $30,000.
If we emphasized all moderately priced products then that would bring in
$39,650 with our entire capacity. Another
way you could do this example is to say well I know I can display 300
designer and I can display 650 moderately priced. I know my
contribution margin per unit for designer is $100 and
$61 from moderately priced. If I multiply that through the total
contribution margin for designer is $30,000. The total
contribution margin for moderately priced- $39,650.
Again we could really stop right there that three-line process. But if you then
divide that by the capacity which is 10,000 square feet you then can get
that contribution margin per square foot for designer of $3.00 and
for moderately-priced of $3.965
$3.965 cent.
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