Maximizing Profits Through Better Sales-Mixture Control
BY ROBERT G. WRIGHT Principal, Chicago Office
Presented before the Chicago Control of Controllers
Institute of America — April 1957
As controllers, you know that some sales are more profitable than others. You know that, at a given volume, total profits will be greater when more of the total sales stems from the more profitable products. Too often, however, control of this important element in the success of a business is based upon rather unsophisticated techniques.
The present trend toward more scientific management very likely will produce useful techniques for controlling sales mixture. Meanwhile, controllers
can develop surprisingly effective control from existing techniques.
Obviously, a "cookbook" plan for controlling sales mixture — a plan applicable to all companies — has never been developed, nor is one likely to be developed. The type and degree of control needed by a particular company will depend upon the type of industry to which it belongs, the number of product lines carried by the company, the number of products within each line, its distribution channels, and other factors. The plan to be discussed here was "custom made" for a particular company. Many features of the plan, however, can be modified to meet the needs of a variety of other businesses.
The plan uses direct costing techniques. However, since many controllers
— and their independent public accountants — are not completely "sold" on direct costing, I will refer to direct costs as variable costs. Also, as you will see, a complete direct cost system is not needed for the success of the plan. The plan capitalizes on certain advantages of direct costing for planning and control purposes, but permits orthodox practices regarding inventory valuation and report presentation.
The basic approach of the plan is that marginal profit, rather than gross profit, is the key to sales-mix control. Marginal profit represents sales less variable costs. Variable costs, such as direct labor and production materials, are incurred only because the particular product is carried. Fixed costs, known also as standby costs or constant expenses, are excluded in the determination of marginal profits.