1. | Firms face many constraints on their activity and plan accordingly: - ________ demand - ________ skilled labour and other production resources - ________ finance (‘capital rationing’). |
2. | The usual objective in questions is to maximise profit. Given that fixed costs are unaffected by the production decision in the short run, the approach should be to maximise the ____________ earned. |
3. | If there is one limiting factor, then the problem is best solved using ___ ______ analysis |
4. | Where there are two or more resources in short supply which limit the organisation’s activities then ______ ____________ is required to find the solution. |
5. | Linear programming is used to: |
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6. | Limiting factor analysis - Assumptions: There is a single quantifiable objective – e.g. maximise contribution. In reality there may be multiple objectives such as maximising return while simultaneously minimising risk. |
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7. | Limiting factor analysis - Assumptions: Each product always uses the same quantity of the scarce resource per unit. In reality this may not be the case. For example, learning effects may be enjoyed. |
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8. | Limiting factor analysis - Assumptions: The contribution per unit is variable. In reality this may not be the case: - the selling price may have to be increased to sell more - there may be economies of scale, for example a discount for buying in bulk |
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9. | Limiting factor analysis - Assumptions: Products are not independent – in reality - customers may expect to buy both products together - the products may be manufactured jointly together. |
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10. | Limiting factor analysis - Assumptions: The scenario is long term. This allows us to ignore fixed costs. |
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11. | _____ 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. _____ is important because unused resources can be put to another use, e.g. hired out to another manufacturer |
12. | The ______ price of a resource can be found by calculating the increase in value (usually extra contribution) which would be created by having available one additional unit of a limiting resource at its original cost. It therefore represents the maximum premium that the firm should be willing to pay for one extra unit of each constraint. |
13. | Non-critical constraints will have _____ shadow prices as slack exists already |
14. | Management can use shadow prices as a measure of the maximum ________ that they would be willing to pay for one more unit of the scarce resource. |
15. | Shadow price should be considered carefully. For example, the shadow price of labour may be calculated as $20 per hour. However, it may be possible to negotiate a _____ shadow price than this. |
16. | If more of the critical constraint is obtained, the constraint line will move outwards altering the shape of the ________ region. After a certain point there will be little point in buying more of the scarce resource since any non-critical constraints will become critical. |