Plain definition
A limiting factor is the resource or condition that prevents a business from meeting all otherwise profitable demand. It might be skilled labour, machine time, material availability, or customer demand itself. When one production resource is scarce, the useful ranking is contribution per unit of that scarce resource, not contribution per product. Contribution here means sales less the relevant variable costs.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
Suppose a factory has 100 machine hours available. Product A earns contribution per unit and uses three hours; product B earns and uses one hour. A earns more per product, but B earns per machine hour against A’s . There is demand for at most 60 units of B and ample demand for A.
Make the 60 units of B first, using 60 hours and earning contribution. The remaining 40 hours allow 13 whole units of A, earning and leaving one hour unused. Total contribution is , before unchanged fixed costs. Simply choosing the product with the higher unit contribution would waste earning capacity.
| 60 units of B × SAR 50 | |
|---|---|
| 13 units of A × SAR 60 | |
| Total contribution before fixed costs |
Why it matters
A bottleneck changes the meaning of a good margin. An apparently attractive product can absorb the resource needed for several better orders.
Practical consequence
Confirm the actual bottleneck, demand limits, processing time, and contribution for each product. Rank by contribution per scarce-resource unit, then respect whole-unit production and commitments. Recalculate when capacity or demand changes. If several resources bind at once, use a model that considers them together; a single ratio may no longer find the best mix.