Week 21 - Decision Making Under Constraints Flashcards

1
Q

Best method to use when under capacity constraints

A

Key Factor Analysis:
identifies optimal production plan under the conditions imposed by the constraining factor

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2
Q

4 steps in Key Factor Analysis Process

A

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

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3
Q

Additional factors to consider in Key Factor Analysis
2

A

Customers - brand reputation and loyalty

Competitors - reactions, market share

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4
Q

Capital rationing when limited by capital - 4 steps
FOR DIVISIBLE PROJECTS

A

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

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5
Q

Profitability Index and what PI is good

A

PV of future cash flows / Initial Outlay

Accept projects with PI > 1
Reject projects with PI < 1

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6
Q

Benefit Cost Ratio

A

NPV / Total outlay

Accept when BCR > 0
Reject when < 0

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7
Q

Limitations of capital rationing

A

Non-linear relationships - this is a big assumption that completing half a project will yield half revenue

Some projects are Indivisible

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