Limiting Factor Analysis Flashcards
Name 5 Examples of Limiting Factors:
- Market demand
2.Materials - Labour
- Machine hours
- Money
What are the 3 steps to Maximise Contribution with a Limiting Factor?
- Determine limiting factor by producing maximum demand
- Rank products by contribution per unit of limiting factor
- Prepare a production plan
What is the definition of Shadow Price?
The increase in value which would be created by having available one additional unit of a limiting resource at the original cost.
Name the three things a shadow price is:
- Additional contribution generated from one additional unit of a limiting factor
- Opportunity cost of not having the use of one extra unit of a limiting factor
- Maximum extra amount that should be paid for one additional unit of scarce resource.
When can’t Contribution per unit be used for Limiting factor?
- More than one limiting factor exists
- Products rank differently for the resources.
Graphical Linear programming is used when there is more than 1 limiting factor. What are the steps?
- Define the variables
- Formulate the objective
- Formulate constraints
- Plot constraints on a graph
- Determine optimal solution
What is the definition of Feasible Region?
The area contained within all of the constraint lines shown in a graphical depiction of linear programming problem. All feasible combinations of output are contained within or located on boundaries of feasible region.
What is the definition of Slack?
Occurs when maximum availability of a resource or other constraining factor is not used.
What is the definition of Surplus?
When more than minimum requirement is used : surplus is excess over minimum amount of constraint, where constraint is a ‘more than equal to’ constraint.
Name the 2 implications of Slack?
- High slack - inefficient use of resource. resource should be reallocated to another part of business or labour subcontracted to another company.
- Low slack - resource could be a binding constraint. should investigate whether additional suppliers can be identified.
What are the 6 Assumptions made in Linear Programming?
- Fixed costs are unchanged by a decision
- Unit variable cost is constant
- Estimates of demand and resource requirements are known with certainty
- Units of output are divisible
- Total amount of each scarce resource is known with certainty
- There is no interdependence of demand between products
What are the 5 limitations of Linear Programming?
- Difficult to identify which resources are likely to be in short supply and their availability
- Management may not make product mix decisions that are profit maximising.
- Linear relationship may not exist
- Model is static. Not suitable for analysing over time
- Practical solution derived from linear programming model may be of limited use
