Product Mix Decision Term Paper

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Behavior

XY Company is considering adding a new product line to its current mix, which consists of products X and Y. There are two options that it faces, Product W. And Product Z. The purpose of this report is to examine these two alternatives in order to try and understand which of these products is a better addition to the product mix. There are a number of variables that come into play. While both products appear to be profitable, the impact of this decision on the company as a whole needs to be taken into consideration.

Product W.

The addition of Product W. To the company's product lines results in a variable cost income statement as follows:

Product X

Product Y

Product W

Total

Sales

$275,000

$400,000

$110,000

$785,000

Less variable expenses

Production

100,000

200,000

55,000

$355,000

Selling and administrative

20,000

60,000

11,000

$91,000

Contribution margin

$155,000

$140,000

$44,000

$339,000

Less direct fixed expenses

10,000

55,000

10,000

$75,000

Segment margin

$145,000

$85,000

$34,000

$264,000

Less common fixed expenses

75,000

Net income

$189,000

Prior to adding Product W, the company was earning a net income of $155,000. Thus, adding the new product adds $34,000 to the company's bottom line.

Product Z

The other alternative is Product Z. The projected sales for Product Z.

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are significantly higher than the projected sales for Product W. However, the costs are higher as well. The following is the variable cost income statement for Product Z:

Product X

Product Y

Product Z

Total

Sales

$275,000

$400,000

$180,000

$855,000

Less variable expenses

Production

100,000

200,000

126,000

$426,000

Selling and administrative

20,000

60,000

9,000

$89,000

Contribution margin

$155,000

$140,000

$45,000

$340,000

Less direct fixed expenses

10,000

55,000

12,500

$77,500

Segment margin

$145,000

$85,000

$32,500

$262,500

Less common fixed expenses

75,000

Net income

$187,500

As noted, the combined income for the company with Product Z. is $187,500. This is slightly lower than the combined income for XY company if it adopts Product W. Based on this analysis, Product W. is the better of the two options, since they are mutually exclusive.

Dropping a Product

There is another option as well, which is to drop one of the existing products. Based on the segment margin for each product, this would not be recommended, at least if the above tables are computed on the basis of an even one-third split for each product. The following table shows the segment margin for.....

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