Question

When a company attempts to maximize its profits, subject to its production constraint, it uses _____. a. the unit contribution margin of each product per production constraint b. the unit target cost of each product per production constraint c. the unit selling price of each product per production constraint d. the unit product cost of each product per production constraint

Answer 1

Correct answer-----------------a. the unit contribution margin of each product per production constraint

.

In case where there is a production constraint such as limit on labor hours, raw material quantity etc, the product having highest contribution margin per limited resource is produced first and upto maximum demand. If any resource are left then only the second best product (product having second highest CM per unit per limited resource) is produced. See below an example to understand this in detail.

	Product A	Product B	Product C
Sales price	$                 75.00	$          147.00	$    113.00
Variable cost	$                 15.00	$          101.00	$      80.00
Contribution margin per unit	$                 60.00	$            46.00	$      33.00
Machine Hours required	8.00	4.00	1.60
Contribution margin per limited resource	$                    7.50	$            11.50	$      20.63
Produce	Third	Second	First

It can be seen that contribution margin per unit of Product A is highest but it has lower Contribution margin per limited resource so it will be produced last.

Product C is produced first as it has highest CM per limited resource.