Automation and modern technology have driven factory overhead up while shrinking direct labor. Because of this, traditional costing models that spread overhead based on labor hours are no longer accurate. They distort product costs, making complex, low-margin lines look deceptively profitable. This paper shows when overhead activities such as setups and inspection are included as cost drivers and capacity constraints, the optimal product mix may differ from the solution obtained from the traditional costing or contribution-margin-only analysis. By treating these activities as real variable costs and adding their hard capacity limits to our constraints, not only the optimal product mix is changed, but also the true net profit can be improved. By using an ABC-linked linear programming model, manufacturing businesses can detect binding constraints, optimize their product mix based on actual resource use, and maximize the profit out of their operations.

Keywords

Optimal Product Mix, Activity-Based Costing Method, Traditional Costing Method, Linear Programming, Contribution Margin Approach