# Flashcard Set Preview

Side ASide B

1 Introduction
What constraints can a firm face?

1 Introduction
- limited demand
- limited skilled labour and other production resources
- limited finance (‘capital rationing’).

2 Planning with one limiting factor
What are the five steps using key factor analysis if there is one limiting factor?

2 Planning with one limiting factor
Step 1: identify the bottleneck constraint
Step 2: calculate the contribution per unit for each product
Step 3: calculate...

3 Several limiting factors – linear programming Steps involved for linear programming

3 Several limiting factors – linear programming

3 Several limiting factors – linear programming
Limiting factor analysis assumptions

1) There is a single quantifiable objective – e.g. maximise contribution. In reality there may be multiple objectives such as maximising return while simultaneously minimising...

4 Shadow prices and slack
1) What is slack?
2) Why is it important?

4 Shadow prices and slack
1) Slack is the amount by which a resource is under-utilised. It will occur when the optimum point does not fall on a given resource line.
2)...

4 Shadow prices and slack
1) What are shadow (duel) prices?
2) How is the shadow cost found?
3) What about non-critical constraints?

4 Shadow prices and slack
1) It represents the maximum premium that the firm should be willing to pay for one extra unit of each constraint
2) The shadow...

4 Shadow prices and slack
How to calculate shadow costs

4 Shadow prices and slack
Step 1: Take the equations of the straight lines that intersect at the optimal point. Add one unit to the constraint concerned, while...

4 Shadow prices and slack
What are the implications of shadow prices?

4 Shadow prices and slack
- Management can use shadow prices as a measure of the maximum premium that they would be willing to pay for one more unit of the scarce resource
-...