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Resource Constraints

Now let’s suppose we have two products, and based on what we learned in the prior sections, we’ve already dissected the costs and calculated the contribution margin of product A to be $5 per unit and the contribution margin of product B to be $3 per unit. Suppose both products require the use of a common resource, which has only a limited capacity. For example, suppose a production machine has a maximum number of hours it can be used in a month, and both products require its use. Where should we allocate the capacity: to producing product A or B? Because A has the higher contribution, that’s the better choice, right?

From

Cover of Financial Literacy for Managers: Finance and Accounting for Better Decision-Making

Note

Resource limitations are a reality. When you are in a situation where multiple products or projects require attention, it can be difficult to know which one to pour your resources into. Although there aren’t any easy answers, there are ways to think about the situation that can help you make important decisions.