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Determination of Profitable Mix When there is NO limiting factor

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 asked

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 answered

The product priorities and withdrawal of a product should be decided on the basis of contribution that each product offers and not the net profit. If the demand for various products is of complementary nature, then the total contribution based on various product combinations should be considered. Also, if the fixed cost changes, as the product mix changes, then, that should also be considered which means that the decision is based on net profit. However, absorption costing should be completely ignored for such decisions.

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 answered

The total fixed cost to be incurred remaining constant, the product, which offers more contribution per unit, is more profitable product because it would maximise the total contribution and therefore the net profit. Accordingly, calculate contribution per unit or the total contribution that each product makes and the product which offers highest contribution will be taken as most profitable one and so on. As long as the contribution per unit is positive, the product is profitable.

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