The question as to which products to stress in order to obtain the most profitable sales-mix has always been of prime importance to businessmen. The amount of profit contribution, or the difference...

The question as to which products to stress in order to obtain the most profitable sales-mix has always been of prime importance to businessmen. The amount of profit contribution, or the difference between the selling price and the variable costs, tells how much each product is contributing to fixed costs and profit in the present sales-mix. This information assists management in forming an opinion as to which products will add to profits if sales of these units can be increased. Direct cost data can be utilised in this type of analysis when management seeks an answer to the question: “Which product shall we push”?

1. What is the amount of net profit for each product?

2. What is the percentage of profit to selling price for each product?

3. What is the amount of profit contribution towards fixed cost and the profit for each product?

4. What is the profit contribution ratio?

5. What is the profit contribution per hour for each product?

6. If one allocates: (a) 200 hours to Product A and 100 hours to Product B or (b) 100 hours to Product A and 200 hours to Product B, which of the two courses is more profitable?