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Management accounting 2022

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Question:

How does capacity constraints affect product-mix decisions, and what is the decision rule under capacity constraints?

Author: Hjalmer Pedersen



Answer:

If there is a production constraint, we must find the optimal mix of products to produce under the constraint to maximize profits. For instance, if the firm cannot produce enough of the most profitable products, they must find what products to prioritize. Decision rule under capacity constraints: Prioritize the product with the highest contribution margin per unit of the constraining factor.


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