Computing the Sales Mix with Limited Resources

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  • 0:03 The Sales Mix and…
  • 0:49 Calculating Sales Mix
  • 2:44 Theory of Constraints
  • 3:43 Lesson Summary
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Lesson Transcript
Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

Businesses face limitations in producing their products or services. In this lesson, you'll learn how a business determines its optimal sales mix with limited resources.

The Sales Mix and Limited Resources

Sales mix refers to the combination of goods that a business produces. The ideal sales mix would be the one that produces the most profit for the business given the resources it has available. Resources are finite, meaning that any business could face a shortage of labor, materials, or building space used to produce its products.

Let's meet Ms. Ashe, who owns a furniture manufacturing company. Her company produces living room chairs and dining tables using wood from sustainable forests. There is currently a world-wide shortage of this wood, so materials would represent her limited resource. Ms. Ashe would like to calculate the best mix of chairs and tables to manufacture so she can earn the greatest profit.

Calculating Sales Mix

A business incurs many manufacturing costs, and these can be classified as fixed or variable costs. Fixed costs are costs that do not vary with the number of items produced. For example, Ms. Ashe would have to pay rent for her production facility on a monthly basis, and the amount of rent she pays would not change if she produced one chair or 10,000 chairs. Variable costs, on the other hand, are costs that do change with the amount of items produced. Ms. Ashe would have to pay more employees, and she would have a higher utility bill if she were producing 10,000 chairs instead of just one. When determining the proper sales mix, a business must calculate its contribution margin per unit, which is the earnings that are available to contribute to fixed costs and profit. The formula for calculating contribution margin per unit is selling price - variable cost for each unit produced. Let's look at that information for Ms. Ashe's business.

Contribution margin per unit

By focusing on contribution margin per unit, management might conclude that it would be better to produce more tables as they have a higher contribution margin ($200 vs. $75). However, in a situation with limited resources, Ms. Ashe needs to calculate the contribution margin for each unit, taking the limited resource into consideration. In this case, the formula would be contribution margin per unit / material in pounds (since materials represent the limited resource).

Now, we can look at the calculation of contribution margin per unit of limited resource:

Contribution margin per unit with limited resource

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