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?
- Resource Constraints
- from Financial Literacy for Managers: Finance and Accounting for Better Decision-Making
- Publisher: Wharton Digital Press
- Released: May 2012
Resource limitations are a reality. When you have multiple products or projects, it can be difficult to know which ones to invest in. Although easy answers are rare, you can use financial data to help you make the best decisions.
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