Question

If some products must be cut back because of a constraint:

a) Produce the products with the highest contribution margin per unit of constrained resource.

b) Produce the products with the highest net operating income per unit

c) Produce the products with the highest selling price

d) Produce the products with the highest contribution martin per unit

Answer 1

The answer is: A) Produce the products with the highest contribution margin per unit of constrained resource.

Step-by-step explanation:

Follow my example:

A brewery produces two types of beer; dark and light. They share the same ingredients, malt and wheat. You can get all the wheat they need but only 500 units of malt.

• Dark beer needs 2 units of malt and they can earn a $3 profit per bottle.
• Light beer needs 1 unit of malt and they can earn a $2 profit per bottle.

Your total production can be 250 dark beers with a $750 profit, or 500 light beers with a $1,000 profit.

You should only produce light beer since your contribution margin per unit of malt is $2, while dark beer's contribution margin per unit of malt is $1.50