Week 21 - Decision Making Under Constraints

Question 1

Best method to use when under capacity constraints

Answer 1

Key Factor Analysis:
identifies optimal production plan under the conditions imposed by the constraining factor

Question 2

4 steps in Key Factor Analysis Process

Answer 2

1 - determine limiting factor w.g. Available labour

2 - Calculate contribution per unit of limiting factor

3 - Rank products in order of contribution per unit of limiting factor

4 - Work out optimal production plan

Question 3

Additional factors to consider in Key Factor Analysis
2

Answer 3

Customers - brand reputation and loyalty

Competitors - reactions, market share

Question 4

Capital rationing when limited by capital - 4 steps
FOR DIVISIBLE PROJECTS

Answer 4

1 - calculate NPV of each project
2 - Calculate profitability index of each one
3 - Rank projects using profitability index
4 - Allocate funds until they have all been used

Question 5

Profitability Index and what PI is good

Answer 5

PV of future cash flows / Initial Outlay

Accept projects with PI > 1
Reject projects with PI < 1

Question 6

Benefit Cost Ratio

Answer 6

NPV / Total outlay

Accept when BCR > 0
Reject when < 0

Question 7

Limitations of capital rationing

Answer 7

Non-linear relationships - this is a big assumption that completing half a project will yield half revenue

Some projects are Indivisible