What is the a shadow price?
The additional contribution gained from having one extra unit of scarce resource.
It is the maximum extra you would pay for this additional unit of scarce resource.
What is the process for a single limiting factor?
- identify most limiting factor
- calculate contribution per unit
- calculate contribution per unit of limiting factor
- rank products in order of contribution per unit of limiting factor
- optimal production plan.
How do we calculate contribution per unit of limiting factor?
Contribution per unit / scarce resource per unit.
How is the return calculated in limiting factor analysis and throughput accounting?
Return = Sales - Material Purchases
What is the main method for solving problems with more than one constraint?
Linear Programming
What are the steps for formulating the multi-constraint model?
- Define Variables (2 only for F5)
- Establish constraints
- Formulate objective function
- Plot graph*
- Determine feasible region optimal point
- Plot objective function*
- Calculate value of objective function using iso contribution line.
*Only applicable to graph questions.
What is slack?
Slack occurs when the maximum availability of a resource is not used.
When would we be using a shadow price?
When we have maximised resources. It is the premium willing to be paid for an extra unit of the resource.
What is surplus?
When more output than the minimum requirement is made.
