Merchandisers should consider the __ when making sales mix decisions.
A total gross margin
B contribution margin per unit of the constraint
C manufacturing overhead
D total contribution margin
The correct answer and explanation is:
Correct Answer: B) Contribution margin per unit of the constraint
When merchandisers make sales mix decisions, they should focus on the contribution margin per unit of the constraint because it helps them determine how to best use their limited resources to maximize profit.
In any business, especially in retail or merchandising, resources such as shelf space, labor hours, or inventory investment are often limited. These limitations are known as constraints. When a constraint exists, businesses need to analyze which products generate the highest contribution margin in relation to that constraint. The contribution margin is the amount each unit of product contributes toward covering fixed costs and generating profit. It is calculated as sales price minus variable costs.
Let’s consider an example. If a retailer can only display 100 feet of shelf space and has two products to sell, they need to decide how to allocate that space. Suppose Product A generates a contribution margin of \$10 per unit and takes up 2 feet of shelf space, while Product B generates \$8 per unit but takes up only 1 foot. When comparing contribution margin per foot (the constraint), Product A gives \$5 per foot (\$10 ÷ 2), and Product B gives \$8 per foot. In this case, Product B is more profitable per unit of constraint.
This approach ensures the business makes the most profit possible from limited resources. Focusing only on total contribution margin or total gross margin without considering the constraint could lead to suboptimal decisions. Manufacturing overhead is also not directly relevant to merchandisers who typically deal with purchasing finished goods rather than producing them.
In conclusion, merchandisers should always analyze contribution margin per unit of the constraint to make the most efficient and profitable sales mix decisions when resources are limited.