Ch6: Limiting Factor Decisions Flashcards
SINGLE LIMITING FACTOR (1) Limiting Factor Analysis (2) One Limiting Factor (3) Shadow Price (4) Throughput Accounting (5) Decisions with a Limiting Factor (6) Shadow Prices in Make vs Buy MULTIPLE LIMITING FACTORS (7) Linear Programming (8) Limitations of using the Graphical Method (9) Slack (18 cards)
What is Limiting Factor Analysis?
It is used to maximise contribution and profit by using scarce resources on the products that make the best use of them when sales demand is greater than productive capacity.
What are examples of limiting factors in production?
- Labour.
- Materials.
- Machinery.
- Factory space.
What is the rule for limited resources in Limiting Factor Analysis?
Make all those products which give a positive contribution up to maximum demand.
What is the approach to decide which products to make when one factor of production is limited?
(1) Identify the limiting factor.
(2) Calculate the contribution per unit of each product.
(3) Calculate the contribution per unit of limiting factor.
(4) Rank the products (Highest contribution = 1st).
How do you calculate the Contribution Per Unit of Limiting Factor?
Contribution Per Unit of Limiting Factor = [ Contribution Per Unit (CPU) / Units of Scarce Resources Used ]
What are the limitations of Key Factor Analysis?
- Assumes a single objective of profit maximisation.
- Constant VCPU and TFC
- Deals with only one scarce resource, and applies only to short-term capacity constraints.
What is a Shadow Price?
The additional contribution that would be generated if one more unit of the scarce resource were to become available.
How is the maximum price for an additional unit of scarce resource calculated?
Maximum Price for an Additional Unit of Scarce Resource = Regular Price + Shadow Price.
What are the steps in Throughput Accounting?
(1) Determine the bottleneck resources.
(2) Calculate the throughput per unit.
(3) Calculate the throughput return per hour of bottleneck resources.
(4) Rank the products.
(5) Allocate resources to arrive at an optimum production plan.
What is the formula for Savings Per Unit of Scarce Resources in make vs buy decisions?
Savings Per Unit of Scarce Resources =
[ (Buy In Price - Variable Cost to Make) / Number of Units of Scarce Resources Used Per Unit ]
GREATEST SAVINGS PER UNIT OF SCARCE RESOURCES = HIGHER PRIORITY.
When is the Shadow Price relevant in make vs buy decisions?
(1) When internal production is limited due to the shortage of a particular factor.
(2) When production of some items is being outsourced.
What is an Objective Function in Linear Programming?
A quantified statement of the aim of a resource allocation decision, such as profit maximisation or cost minimisation.
What is a Constraint in Linear Programming?
An activity, resource, or policy that restricts the business from achieving its objectives.
What is the Feasible Region in Linear Programming?
An area contained within the constraint lines on a linear programming graph that shows all the feasible combinations of output.
What are the steps in the Linear Programming process?
(1) Define variables.
(2) Formulate the objective function.
(3) Express constraints in terms of inequalities.
(4) Plot constraints on a graph.
(5) Identify the feasible region.
(6) Plot the slope of the objective function.
(7) Calculate the value of the objective function at the optimal point.
What are the limitations of using the Graphical Method in Linear Programming?
- LINEARITY = Contribution and resource utilisation per unit are the same for any quantity produced and sold in the range under consideration.
- INFINITE DIVISIBILITY OF PRODUCTS = Can’t be rounded or have integers as ROUNDING UP = may be outside the feasible region or ROUNDING DOWN = may go away from the origin.
- SOLUTION IS DEPENDENT ON QUALITY OF INPUT DATA - must be complete, accurate and valid.
- ONLY ONE QUANTIFIABLE OBJECTIVE can be satisfied.
What is Slack in Linear Programming?
Occurs when the maximum availability of a resource or other constraining factors is not used, indicating spare capacity.
What are the implications of high and low slack?
- High slack = inefficient use of a resource,
- Low slack = resources could become a binding constraint.
