Posted in Operations and Supply Chain Terms, Total Reads: 2204
Definition: Product Mix Decision Making (PMDM)
A product mix is defined as the number of product lines that a company sells. A company may have a single product line in which case its product mix becomes the number of products being offered in the line (Length). On the other hand a company may have number of product lines each of which may then have a number of products indicating width. Product mix decision making refers to the decision taken by production manager about which products to produce in which quantity given the some kind of limiting factor in producing all the products in the desired quantity.
For example let us assume a company has three products that it sells to market called A, B and C. The direct labor costs is 5/hour. Let the total direct hours available be 15000 hours. Opening stocks and WIP are not there. The Variable costs, Sales price and Sales demands are as given below:
Direct Material Cost
Standard Hours Per Unit
Direct Labor cost
In order to meet the entire sales demand the number of hours required would be (1800×4)+(1500×3)+(1600×3.5)=17300. While the number of hours available is only 15000, so the number of hours available becomes the limiting factor.
Let us now look at the contribution per unit as well as contribution per limiting factor which in this case is the number of hours
Contribution Per Unit
Contribution per Limiting Factor
Thus we see that based on rankings in terms of contribution per limiting factor C comes first followed by A and then B even though B has a greater per unit contribution. Thus C will be produced in full requiring 5600 hours, then A will be produced for 7200 hours and then B will be produced for (15000-(5600+7200)) hours = 2200 hours. Thus the number of units of B that will be produced will be 2200/3 = 734 units.
Thus based on the limiting factor a optimal mix of products to maximize the profits is taken.