8. Limiting Factors

Question 1

What are examples of limitign factors

Answer 1

• Market demands
• Resources/ Materials available
• Labour
• Machine hours
• Money

Question 2

How do business maximise profit given limiting factor

Answer 2

• Determine limiting factor
• Rank products by contribution per unit of limiting factor
• Prepare production plan

Question 3

Define shadow price

Answer 3

The increase in value which could be created by having available one addititional unit of a limiting resource at the original cost

Question 4

Explain features of shadow price

Answer 4

• Additional contribution generated from one additional unit of limiting factor
• Opportunity cost of not having the use of one extra unit of limiting factor
• Maximum extra amount that should be paif for one additional unit of scarce resource

Question 5

How to work out Throughput return

Answer 5

Tp Return = Sales price - material costs

Question 6

When is contribution per unit not relevant

Answer 6

• More than one limiting factor exists
• Products rank differently for these resources

Question 7

What are alternative methods for contribution per unit when there are multiple limiting factors

Answer 7

• Graphs
• Simultaneous equations

Question 8

What are the steps of graphical linear programming

Answer 8

1: Define variables
2: Formulate objective function
3: Formulate constraints ( amount of resouce used ≤ amount available)
4: Plot constrains on graph to identify feasible region
5: Determine optimal solution

Question 9

Define objective function

Answer 9

Quantified statement of the aim of a resource allocation decision

Question 10

Define Constraint

Answer 10

• An activity, resource or policy that limits the ability to achieve objectives

Question 11

Define Feasible region

Answer 11

The area contained wihtin all of the constaint lines shown on a graphical depiction of linear programming

Question 12

What is meant by slack

Answer 12

Occurs when maximum avqailability of a resource or other constraining factor is not used

• if at optimal solution, the amount of resource used is less thn the amount of resource available - there is spare capacity and so slack

Question 13

What is meant by surplus

Answer 13

Occurs when more than a minimum requirement is used - surplus is the excess over the minimum amount of constraint where the cnstraint is a more than/equal to one

Question 14

What are the implication of slack

Answer 14

• High slack indicates inefficient use of resource - resource should be reallocated
• Low slack indicate this resource could become binding constraint

Question 15

What are the assumptions of linear programming

Answer 15

• Fixed costs are unchanged by decision
• Unit variable cost is constant
• Estimates of demana and resourdce requirements are assumed to be known with certainty
• Units of output are divisible
• Total amount of each scare resource is known
• There is no interdependence of demand between products

Question 16

What are limitations of linear programming

Answer 16

• May be difficult to identify which resource are likely to be in short supple and their availability
• Management may not make profit maximising
• Linear relationship may not exist
• Linear programming model is static - cannot see over time
• Practical solution from linear programming may be limited