Industry : Manufacturing Industry (Consumer durables)
Countries : India
Optimization of Sales Mix - Evaluation of Alternatives for Decision Making
Rameshwar started a High-density polyethylene (HDPE) moulded bucket manufacturing unit in the month of April 2019. He was successful in producing and selling around 130,000 units of the 21 liter capacity HDPE moulded bucket (Product-1) within the first seven months of launching commercial business operations. Rameshwar found that there was high demand for 18 liter HDPE buckets and planned to manufacture these too (Product-2) simultaneously.
However, the dilemma he faced was what sales mix he should adopt to get the maximum profit. The present case study has been designed to discuss the concepts of absorption costing and marginal costing. It is also intended to give the students an understanding of how the marginal costing technique helps in determining the optimum sales mix of Product-1 and Product-2.
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The difference between absorption costing and marginal costing.
The application of the marginal costing technique in the decision-making process.
Various components of the marginal costing technique.
The process of selecting the optimum sales mix of different products.
After successfully completing and delivering two sets of orders of Product-1 (21-liter bucket), Rameshwar of Rameshwar Plastics was planning to launch a new type of plastic bucket as per market demand. The new High-density Polyethylene (HDPE) bucket (Product 2) would be of 18 liter capacity, weigh around 750 grams, and have a diameter of 250 mm (25 cms) and a height of 400 mm (40 cms). The selling price of the bucket (Product-2) was estimated to be Rs. 120 per unit. Rameshwar wanted to determine the optimum sales mix of the products (Product-1 and Product-2), that would help him maximize profitability. The per unit cost of raw material varied depending on the quantity required to manufacture one bucket. The direct wages were estimated to be Rs. 8 per bucket and the other variable overheads were 120% of direct wages. The total fixed costs remained constant...