The general manager has asked for your advice in relation to this disagreement within the management…

(Product Mix Decision) Process Solutions provides a computer-based document processing service. The accountant has produced the following analysis.

Standard

Modified

Advanced

Sales quantity

1,000

1,100

1,200

Selling price

$5

$5

$6

Sales revenue

$5,000

$5,500

$7,200

Labour hours

100

120

160

Labour cost @ $20/hour

$2,000

$2,400

$3,200

Contribution margin

$3,000

$3,100

$4,000

Contribution margin per unit sold

$3

$2.82

$3.33

The sales manager, whose team is paid a commission on sales revenue, prefers to sell the higher priced Advanced service. This is also the preferred service for the accountant, although not for the same reason. The accountant argues that the Advanced service is better because of the higher contribution margin per unit sold. The operations manager argues that the advanced service consumes more labour hours than the Standard or Modified services and as labour availability limits his ability to process work, this should also be taken into account. The operations manager prefers the Standard or Modified service, as these provide greater ability to use his capacity more flexibly.

The general manager has asked for your advice in relation to this disagreement within the management team. What advice would you give her?

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