4 Planning with limiting factors

Question 1

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

Answer 1

With key factor analysis

Question 2

What is the steps in key factor analysis?

Answer 2

1. Identify scarce resource
2. Calculate contribution per unit for each product
3. Calculate contribution per unit for the scarce resource for each product
4. Rank the products in order of the contribution of the scarce resource
5. Allocate resources using this ranking

Question 3

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

Answer 3

Linear programming

Question 4

What is the steps to linear programming?

Answer 4

1. Define the variables
2. Define and formulate the objective
3. Formulate the constraints
4. Draw a graph identifying the feasible region
5. Solve for the optimal production plan
6. Answer the question

Question 5

What does the feasible region show?

Answer 5

Those combinations of variables which are

possible given the resource constraints

Question 6

What does limiting factor analysis assume?

Answer 6

• 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

Question 7

What is slack?

Answer 7

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

Question 8

Why is slack important? (2)

Answer 8

• 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

Question 9

What is a shadow price?

Answer 9

Is the increase in
contribution created by the availability of one additional unit of the limiting
factor at the original cost.

Question 10

What will non-critical constraints show?

Answer 10

Zero shadow prices as slack exists already

Question 11

How do you calculate shadow prices?

Answer 11

1. Take equations of the straight lines
2. Use simultaneous equations to solve
3. Calculate revised optimal contribution

Question 12

What are the implications of shadow prices?

Answer 12

1. 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.