Question

An executive of a large steel company put the blame for lower net income for a recent fiscal period on the ""shift in product mix to a higher proportion of export sales."" Sales for the period increased slightly while net income declined by a percent such as 25%. Explain how a change in product (sales) mix to a higher proportion in export sales could result in a lower level of net income.

Answer 1

A business can improve its average contribution ratio and its overall profitability, by shifting its sales mix to include more products with high contribution margin ratios.

In this case American steel company shift in product mix is due to a higher proportion of export sales. This shift caused to decline net income of the company. This is because the contribution margin ratio on export sales may lower than the other product mix. So, the shift of product mix to low contribution sales will cause to decline the net income.