If there is a limiting factor, how should this be solved?

With key factor analysis

What is the steps in key factor analysis?

- Identify scarce resource
- Calculate contribution per unit for each product
- Calculate contribution per unit for the scarce resource for each product
- Rank the products in order of the contribution of the scarce resource
- Allocate resources using this ranking

If there is several limiting factors, how should this be solved?

Linear programming

What is the steps to linear programming?

- Define the variables
- Define and formulate the objective
- Formulate the constraints
- Draw a graph identifying the feasible region
- Solve for the optimal production plan
- Answer the question

What does the feasible region show?

Those combinations of variables which are

possible given the resource constraints

What does limiting factor analysis assume?

- There is a single quantifiable objective
- Each product always uses the same quantity of scarce resource.
- The contribution per unit is constant
- Products are independent
- The scenario is short term

What is slack?

slack is the amount by which a resource is

under utilised, i.e. slack occurs when the maximum availability of a resource

is not used

Why is slack important? (2)

- For critical constraints (zero slack) then gaining additional units of these scarce resources will allow the optimum solutions to be improved
- For non critical constraints - gaining or losing a small number of units will have no impact on the optimum solution

What is a shadow price?

Is the increase in

contribution created by the availability of one additional unit of the limiting

factor at the original cost.

What will non-critical constraints show?

Zero shadow prices as slack exists already

How do you calculate shadow prices?

- Take equations of the straight lines
- Use simultaneous equations to solve
- Calculate revised optimal contribution

What are the implications of shadow prices?

- Management can use shadow prices as a measure of the maximum

premium that they would be willing to pay for one more unit of the scarce

resource.

2.