Contribution Margin per Constrained Resource: Which Product Comes First?
When one resource is scarce, total unit contribution margin can point you toward the wrong product mix.
Constraint
A limiting factor can be machine hours, labor hours, material units, shelf space, or another scarce resource.
Ranking measure
Divide contribution margin per unit by the amount of constrained resource required per unit to determine contribution per scarce-resource unit.
Product mix
Products are generally prioritized from highest to lowest contribution per constrained resource, subject to demand and other practical limits.
Exam strategy
Do not rank by contribution margin per product unless each product consumes the same amount of the bottleneck resource.
The takeaway
With a binding constraint, prioritize contribution margin per unit of the scarce resource, not contribution margin per finished unit.
Related Summit resources
FAQ
Should products always be ranked by unit contribution margin?
No.
What denominator should you use?
The amount of the constrained resource required per unit.
Can demand limits affect the optimal mix?
Yes.