Week 21 - Decision Making Under Constraints Flashcards
Best method to use when under capacity constraints
Key Factor Analysis:
identifies optimal production plan under the conditions imposed by the constraining factor
4 steps in Key Factor Analysis Process
1 - determine limiting factor w.g. Available labour
2 - Calculate contribution per unit of limiting factor
3 - Rank products in order of contribution per unit of limiting factor
4 - Work out optimal production plan
Additional factors to consider in Key Factor Analysis
2
Customers - brand reputation and loyalty
Competitors - reactions, market share
Capital rationing when limited by capital - 4 steps
FOR DIVISIBLE PROJECTS
1 - calculate NPV of each project
2 - Calculate profitability index of each one
3 - Rank projects using profitability index
4 - Allocate funds until they have all been used
Profitability Index and what PI is good
PV of future cash flows / Initial Outlay
Accept projects with PI > 1
Reject projects with PI < 1
Benefit Cost Ratio
NPV / Total outlay
Accept when BCR > 0
Reject when < 0
Limitations of capital rationing
Non-linear relationships - this is a big assumption that completing half a project will yield half revenue
Some projects are Indivisible