26 4.6 Using a Contribution Margin When Faced with Resource Constraints
-
-
Last updated
- Dec 28, 2020
Learning Objectives
- Use an alternative form of contribution margin when faced with a resource constraint.
Question: Many companies have limited resources in such areas as labor hours, machine hours, facilities, and materials. These constraints will likely affect a company’s ability to produce goods or provide services. When a company that produces multiple products faces a constraint, managers often calculate the contribution margin per unit of constraint in addition to the contribution margin per unit. The contribution margin per unit of constraint16 is the contribution margin per unit divided by the units of constrained resource required to produce one unit of product. How is this measure used by managers to make decisions when faced with resource constraints?
-
- Key Takeaway
Many organizations operate with limited resources in areas such as labor hours, machine hours, facilities, or materials. The contribution margin per unit of constraint is a helpful measure in determining how constrained resources should be utilized.
Review problem 4.6
This review problem is based on the information for Kayaks-For-Fun presented previously. Assume Kayaks-For-Fun found additional labor, thereby eliminating this resource constraint. However, the company now faces limited available machine hours. It has a total of 3,000 machine hours available each month. The River model requires 16 machine hours per unit, and the Sea model requires 10 machine hours per unit.
- Calculate the contribution margin per unit of constrained resource for each model.
- Which model would Kayaks-For-Fun prefer to sell to maximize overall company profit?
- The contribution margin per unit divided by the units of constrained resource required to produce one unit of product.
