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Operations Management: Processes and Supply Chains, 12th Edition by Larry P. Ritzman, Manoj K. Malhotra, Lee J. Krajewski

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Applying the Theory of Constraints to Product Mix Decisions

Managers might be tempted to produce the products with the highest contribution margins or unit sales. Contribution margin is the amount each product contributes to profits and overhead; no fixed costs are considered when making the product mix decision. We call this approach the traditional method, which is often used by nonmanufacturing processes such as the accounting and sales groups within a firm. The problem with this approach is that the firm’s actual throughput and overall profitability depend more upon the contribution margin generated at the bottleneck than by the contribution margin of each individual product produced. We call this latter approach the bottleneck method.

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