Accountancy 200 Fundamentals of Accounting

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Accountancy 200Fundamentals of Accounting

• PRODUCT PLANNING DECISIONS
• Part II

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Product Mix Decisions
Decisions to add or drop a product or service
compare the incremental benefits and costs
associated with such actions. When incremental
benefits exceed incremental costs, the product is
added or retained, depending on the circumstances.
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NP5-5 Adding a New Service
The Beechwood Paper Co. presently sells large
rolls of paper weighing 2,000 pounds to
wholesalers for 1,000 apiece. The wholesalers
cut the paper into letter-size sheets and package
it in 2-pound packages. These packages are sold
to printers for 2 per package. There is no
waste in the cutting process. The Beechwood Co.
currently produces 10 million pounds of paper
annually at a fixed cost of 1 million and a
variable cost of 0.30 per pound. If Beechwood
bypassed the wholesalers and cut its own paper
for sale directly to printers, Beechwood would
have to add equipment and personnel such that the
incremental fixed costs annually would be 3
million. Incremental variable costs would be
0.10 per pound.
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NP5-5 Adding a New Service
Should Beechwood cut its own paper and bypass the
whole-salers?
Selling to Wholesalers
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NP5-5 Adding a New Service
Cutting and Selling to Printers
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Constrained Product Mix Decisions
A constraint is a limitation to the production of
one or more products. The product with the
highest contribution margin is not necessarily
the product that should be promoted when a
constraint exists.
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NP5-20 Maximizing Profit with Constraints
The Judson Co. makes widgets and wangles. Both
widgets and wangles use a polishing machine as
part of production. The widgets and wangles have
the following price/cost characteristics
Machines maximum operation is 3,000 hours per
year.
What product mix creates the greatest profit for
the Judson Co. given all of the constraints?
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NP5-20 Maximizing Profit with Constraints
Widgets
Wangles
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NP5-20 Maximizing Profit with Constraints
What should be the production mix if company
did not have capacity (demand) constraints on
widget/wangle output?
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Limitations to Analyses Presented in this Chapter
Assumes the economic variables are linear Fixed
costs remain unchanged Unit variable costs are
constant Sales price is constant over all ranges
of output. Linear equations does not allow
managers to equate MC and MR to determine optimal
production levels. Ignores differential patterns
of future cash flows, thus assuming that the
future value 1 present value 1.