When there is a constrained resource in production, the best way to increase profits is to:

• A. allocate the resource to the product with the highest contribution margin per unit of the constrained resource
• B. focus on producing the product with the lowest variable cost
• C. increase the price of all products equally
• D. reduce production of all products to match the constraint

Answer: (A)

Verified step by step guidance

1. Understand that when a resource is constrained, the firm cannot produce unlimited quantities of all products, so it must prioritize how to allocate this scarce resource.
2. Recall that the contribution margin per unit is calculated as the selling price minus the variable cost per unit, representing the profit contribution of each unit sold.
3. Since the resource is limited, calculate the contribution margin per unit of the constrained resource for each product by dividing the contribution margin per unit by the amount of the constrained resource required per unit of product.
4. Compare these contribution margins per unit of the constrained resource across all products to identify which product yields the highest profit per unit of the scarce resource used.
5. Allocate the constrained resource to produce more of the product with the highest contribution margin per unit of the constrained resource to maximize overall profits.