6. Limiting Factors

Question 1

How do you calculate an optimal production plan?

Answer 1

1. Identify what the limiting factor is
2. Calculate the contribution per unit for each production
3. Calculate the contribution per unit of the limiting factor for each product
4. Rank the products
5. Work out the optimal production plan

Question 2

What happens if you need to source more of the limiting factor?

Answer 2

You need to take into account any additional costs incurred. Overtime hours may be paid at a premium and hiring additional machines will incur additional costs

Question 3

What are the advantages of subcontracting productions?

Answer 3

• allows a greater volume of sales to be met
• the cost may be lower than producing it ourselves
• quality may be better as subcontractors may be specialist
• business can focus on its core strengths

Question 4

What are the disadvantages of subcontracting production?

Answer 4

• businesses will lose control over production process which could impact quality
• lead times may become longer
• can become too reliant on the sub-contractor who may then increase price significantly
• may limit access to finance