ACCA F5 - Planning With Limiting Factors

Firms face many constraints on their activity and plan accordingly: - ________ demand - ________ skilled labour and other production resources - ________ finance (‘capital rationing’).

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.

If there is one limiting factor, then the problem is best solved using ___ ______ analysis

Where there are two or more resources in short supply which limit the organisation’s activities then ______ ____________ is required to find the solution.

Linear programming is used to:

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.

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.

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

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.

Limiting factor analysis - Assumptions: The scenario is long term. This allows us to ignore fixed costs. 

_____ 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

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.

Non-critical constraints will have _____ shadow prices as slack exists already

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.

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.

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.