Rakesh Sahu
asked almost 4 years ago
acharya
answered over 3 years ago
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.
narahari
answered over 3 years ago
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.
