Limiting Factor Analysis

Question 1

If a business is not constrained by internal facotrs?

Answer 1

It will normally produce and sell as much as demand allows

Question 2

What if a business is constrained by internal factors?

Answer 2

The plans of the business must be built around this internal “limiting” factor

Question 3

How may the production and sales plans of a business may be limited?

Answer 3

By a limiting factor/scarce resource (e.g. the principal budget factor)

Question 4

What could the principal budget factor be?

Answer 4

Market demand
Materials
Manpower
Machine hours
Money

Question 5

What if a business makes more than one product?

Answer 5

It will want to find the product mix that will maximise profit given the limiting factor

Question 6

How is contribution maximised when there is more than one product?

Answer 6

1. Determine limiting factor by producing to maximum demand
2. Rank products by contribution per unit of limiting factor
3. Prepare a production plan

Question 7

What is a shadow price?

Answer 7

The increase in value that would be created by having one additional unit of a limiting resource available

Question 8

What is a shadow price? (additional contribution)

Answer 8

Additional contribution generated from one additional unit of limiting factor

Question 9

What is a shadow price? (opportunity cost)

Answer 9

Opportunity cost of not having the use of one extra unit of limiting factor

Question 10

What is a shadow price? (extra amonut)

Answer 10

The maximum extra amount over and above normal price that should be paid for one additional unit of scarce resource

Question 11

Throughput accounting and limiting factors approach?

Answer 11

We rank products by throughput contribution per unit of limiting factor instead of contribution per unit of limiting factor

Question 12

How to decide which products to make in-house and which to buy from the subcontractor?

Answer 12

Need to look at the difference between the variable cost of making it and the cost of buying it in relation to scarce resource that would be saved by using the subcontractor

Question 13

When can contribution per unit of limiting factor cannot be used?

Answer 13

More than one limiting factor exists

Products rank differently for these resources

Question 14

Ways in which linear programming can be used and can be solved?

Answer 14

Through graphs or simultaneous equations

Question 15

What is an objective function?

Answer 15

A quantified statement of the aim of a resource allocation decision

Question 16

What is a constraint?

Answer 16

An activity, resource or policy that restricts the business from achieving its objectives

Question 17

What is a feasible region?

Answer 17

An area contained within constraint lines on a linear programming graph that shows all feasible combinations of output

Question 18

What if two binding constraints are known?

Answer 18

We can use simultaneous equations to find optimum numebr of each product to manufacture as optimum solution is point of which constraint lines intersect

Question 19

How can shadow prices be calculated from the graphical method?

Answer 19

By relaxing or cosntraining one of limiting factors at a time by a small amount and recalculating the optimal solution and associated contribution