If a firm has limited production capacity in one part of a sequential production operation, it can maximise profits by producing those items having the highest:

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If a firm has limited production capacity in one part of a sequential production operation, it should produce those items that have the highest contribution margin per unit of the scarce resource. This is because the contribution margin is the amount by which the sales price of a product exceeds its variable cost per unit, and it represents the amount of revenue that is available to contribute towards fixed costs and profits. By producing those items with the highest contribution margin per unit of the scarce resource, the firm can maximise its profits as it will be able to generate the highest contribution margin for each unit of the resource that it uses.

If a Firm Has Limited Production Capacity in One Part