7 - Limiting factor analysis

Question 1

what is a limiting factor / scarce resource

Answer 1

limiting factor = anything limiting the activity of an entity

scarce resource = any limiting factor other than sales demand

Question 2

possible limiting factors?

Answer 2

• machine hours
• labour
• materials
• sales demand (ultimate limiting factor)

Question 3

what is an optimal production plan

Answer 3

production budget that maximises contribution from limiting factor

limiting factor decision involves determination of contribution earned by each diff product from each unit of limiting factor

Question 4

steps to doing the optimal production plan

Answer 4

1. identify limiting factor
2. find the contribution per unit (sp - vc)
3. divide by limiting factor per unit to get contribution per limiting factor unit
4. determine optimal production plan by ranking by highest contribution and using all of these first and the rest of the units on the other production units

Question 5

steps to do make vs buy

Answer 5

1. identify limiting factor
2. write down variable cost of making, buying and additional cost to buy
3. divide by limiting factor per unit
4. rank by producing the one that is more expensive to buy and use all of these up first
5. buy the rest of the units (at the cheaper price)

Question 6

how to find maximum contribution

Answer 6

find cont/limiting factor unit
we make all of the item with the most contribution per unit

find units to make by dividing total limiting factor amount by limiting factor per unit of the item with the most contribution

multiply the amount of units by the total cost of the item to get max contribution