Product Mix Decision Making Process
This research paper is about the decision making process in product mix. The top management has the responsibility of determining the optimal mix of product. To determine the process of product mix decision making, qualitative research methods will be used. The data will be collected from secondary sources which include articles, journals and books. This paper will discuss the methods of determining the mix of product that is optimal which include solve, marginal costing and linear programming. Analysis of mix of product is also included. Importance and function of optimal mix of product is also discussed. (Berry, 2005).
Decision making in determining the product mix is very important to a company. The company’s product mix is the total product composites offered by a company. It consists of both individual products and product lines. A product line is defined as products within the mix of products that are related closely either because they are sold to similar customers, function in a manner that is similar, or fall within certain ranges of prices. Determination of the product is very important to a company since this will l have an effect on the profits. (Bragg, 2007).
It is essential for a company to determine its product mix irrespective of the size of the business. A company needs to determine a product mix since maximization of profits is the main objective of the company. If a good selection of product mix is done, a
business with low profits can be converted to a business which is highly profitable by utilizing resources in a productive and efficient manner which will lead to the satisfaction of constraints of buyer and current trends of demand, providing cash flows that are favorable and oversupply prevention. It is very important for a company to have a product mix that is managed well. The management of product mix, actual product and product line into three. Decisions on product mix concerns the combination of lines of product offered by the business. The top management of the business is charged with responsibility of managing the product mix. Decisions on mix of products include:
- Review of the mix of the product lines that are in existence.
- Addition of new lines to the mix of product and removing the lines that are already in existence.
- Determination of the emphasis that is relative on new lines of products versus the lines that are in existence in the mix.
- Determination of the effect of the addition of removal of a line of product in relation to the other lines in the mix
- Determination of the emphasis that is appropriate on development that is internal versus acquisition that is external in the mix of products.
- Determining the impacts on the product mix of the company of external change in the future. (Smith, 2007).
Steps in determination of product mix
The first thing the managers should do in the decision process of product mix is to analyze the demand current trends in their business. The journals related to the industry, sources of the internet and newspapers can help the management in estimating the demand that is current. Also to know the current demand, the management can participate in regional and local shows of trade, seminars and conferences and can also interact with their customers or clients who are potential through carrying out surveys.
The management can also go through their business records and do sales and customer analysis to be able to determine their loyal customers together with their trends. From there, they should focus the quantities of demand in each and every season which will be based on the records that are previous but they should also consider the condition of the current economy. From there, they should determine the season that is right for the production and sale of certain production. The next step in the decision making of product mix is the performance of analysis of budget or production cost. This is the planning of the allocation of resources which include water, capital labor, hours, etc. Resources are scarce and therefore they should be allocated optimumly.
Budgets are important since they provide a planning basis and requirements of financing. Management can do analysis of each product based on the requirements that it needs and do allocation of separate cost for every product. The management should make sure that holding and ordering costs are included in addition to costs of production. The next step is the determination of overhead, variable and fixed costs. These costs should be compared with the average of the industry, the company’s target or a company that is a benchmark. After the comparison, operations should be adjusted if found to very high. Activity based costing can also be employed if the management is not able to do the allocation of costs to different products. From here, the management should employ the appropriated method to determine the best product. (Atkinson, 2004).
Analysis of product mix
The top management of a company analyzes the product mix since they are the ones responsible for the mix of products. The first analysis involves the opportunity areas in a market or industry. Opportunity is the current growth of the industry or attractiveness of a business. The second analysis is the ability of a company to exploit the opportunities and this is based on the company’s potential or current position in the market. The position of a company can be measured by looking at its resources or market share. These factors, the ability of the company and the opportunity provide a company with options that are different.
- Opportunity that is high and exploitation ability leads a firm to introduce products that are new or to expand markets for the products that are in existence so as to ensure growth in the future.
- Opportunity that is low but a market position that is strong will lead a company to attempt to maintain that position to enhance profitability.
- Opportunity that is high but no ability for its exploitation will lead a company to attempt to get the resources that are necessary or to decide not to continue pursuing opportunities in these markets.
- Opportunity that is low and a market position that is weak will lead a company to avoid those markets. An organization can use many ways in making decision on product mix. These include:
These four options are useful in that they provide the company a basis to evaluate existing and new products in order to attain a balance between growth currently and in future. This kind of analysis may result the mix of product to change which will depend on the decisions that the management make. Boston Consulting Group approach is widely used in the determination of the of the product mix. This approach emphasizes two criteria in the evaluation of a company’s mix of product, market share of a product and the rate of growth of the market. This approach employs these criteria since they are related closely to profitability. (Cequea, 2010).
Use of excel solver tool.
This tool is applied by the management in making decision of the optimal product mix. This tool helps in finding certain cells values in a spread sheet that leads to optimization of a given objective. The model for optimization has three parts which are : Constraints, changing cells and target cells. The goal or objective is represented by the target cell. The changing cells are the cells in the spreadsheet that can be changed for the optimization of the target cell. E.g. each product’s amount produced in a month. On the other hand, the constraints represent the management’s place on the cells that are changing. E.g. no more use of resources than their availability and no more production of a production that its sales. This tool is very useful to a company in determining the schedule of production that provides each product’s quantity that should be produced. The decision making process of product mix involves the determination of the amount of a product that is supposed to be produced in a month for the purpose of maximizing profits. Product mix should always satisfy constraints which include:
a) Product mix can only use resources that are available. It is not possible
to carry out production without the necessary resources.
b) Each product has a limited demand. A company cannot produce more
in a month than the demand since the products that are excess will be
The following are steps used in the solver.
1. On the tools menu, select a solver and the parameters of the solver will appear.
2. Click in the box of target cell to put the target cell and select profit cell. Click the box containing the changing cells.
3. Constraints are added at this level to the model. Select the add box.
4. At this level, the constraints of resource utilization can be added. Select the reference cell. Then click the constraint box.
5. In the add constraint, click add to put the constraints of demand. The addition of the constraints helps in assuring that solver will only put into consideration the product combinations that will ensure that the amount of each product produced is not more than the product’s demand.
6 In the box containing the constraint of add, click ok and the parameters of solve will appear.
7. Enter the constraints such that all changing cells in the box with options of solver will be not negative.
8. Click ok in the box containing the options of solver and the major solver box will appear. Click solve and the solver will perform the solution that is optimal for model of product mix. (Martime, 2011).
Use of linear programming model
Linear programming is used in the decision making of a product. It refers to a method which involves computations in determining a course of action that is optimal. The first step is the identification of variables of the decision. This refers to the model elements that are controlled by the maker of the decision. The variables of the decision also refer to those values which determine the model solution. The next step is the determination of the objective in terms of the variables of decision. The function of objective is where the decision maker specifies the goals of what he wants to achieve. T
he goal can be the minimization or maximization of the value of the function of objective. The goal can be the maximization of profits or minimization of costs. The other thing is the identification of constraints. This refers to the limitations on the variables of the decision. It restricts the values which can be taken by the variable. Constraints include resources such as limited man power or capacity of the machine. At the end of this model, the management will have known the best mix of products. (Alexander, 2010).
Use of marginal costing.
This refers to a technique of costing whereby only direct cost or variable is charged to the produced cost unit. It shows the impacts on profit due to the volume change by differentiating the variable and fixed costs. This technique is used in the decision making process of the optimal product mix. It helps the management to know the profitability of products since the main of a business is to maximize profits. Therefore, the management of a company would have a preference of a product mix which is appropriate in the sense that it makes profits that are maximum. Marginal costing will help the management in ascertaining the profitability of combinations of products do the selection of the product that maximizes profits. (Dawkins, 2007).
Importance of an optimal mix of product.
The importance of product mix decision making is that proper mix of products can lead to an increase in sales through offering a service or product that will meet all customers’ demands. The other importance is that a company will be able to compete well with other firms within the same industry. The optimal mix of product has function in that it advertises or provides a single type of product to many customers. (Hall, 2010).
The top management of a business has the responsibility of determining the mix of product. The mix of product is so essential to a business since it facilitates maximization of profits. The management of the mix of product for a business is very demanding and it needs attention that is constant. The top management of a business should provide decisions of the business’ mix of product timely and accurately so that the adjustments that are appropriate can be effected to the line of product and to products. (Alexander, 2010).
Atkinson A, Kaplan R, &Young, M. (2004): Management accounting: Pearson hall.
Banjerjee, B (2005): Management accounting and financial policy. India: Pearson hall.
Berry L, E. (2005): Demystified management accounting. USA: Mc- Graw ltd.
Bragg S, M. (2007): Best practices of management accounting. Canada: Wiley and sons
Cequea, Alexander. (2010): How to calculate product mix. Retrieved from http://www.ehow.com/how_6897990_calculate-product-mix.html
Chapman & Hopwood A. (2008): Management accounting research handbook: Elsevier
Clark, W. (2011): The importance of a product mix: Demand media.
Dawkins, S. (2007): Decision management: CIMA.
Drury C. (2006): An introduction to management accounting. London: Thomson.
Gazely A & Lambert. (2006): Management accounting. Sage publications.
Hall, C, R. (2010): Product mix: Texas University.
Hansen D & Mowen, M. (2008): Managerial accounting cornerstones. Canada: Cengage.
Martime, M. (2011): Use of solver in determining the product mix that is optimal: Sheth K.
Smith J, M. (2007): Management accounting handbook: CIMA.
Thukaram, R, M. (2007): Management accounting. India: New age publications.