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Limiting Factors

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Session Objectives

Identify a single limiting factor Determine the optimal production plan where an organisation is restricted by a single limiting factor Formulate a linear programming problem involving two variables Determine the optimal solution to a linear programming problem using a graphical approach Use simultaneous equations, where appropriate, in the solution of a linear programming problem

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A factor that restricts output. Objective should be to concentrate on those products/services that yield the largest contribution per limiting factor. Limiting factor decisions involve determination of the contribution earned by each different product from each unit of the limiting factor.

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Step 1: Identify the limiting factor Step 2: Calculate contribution per unit for each product Step 3: Calculate contribution per unit of limiting factor

Contribution per unit of limiting factor = Contribution per unit / Units of limiting factor required per unit

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Step 4: Rank products Step 5: Make products in rank order until scarce resources are used up

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Example

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Solution

Step 1: Identify the limiting factor

Machine hours

Given as X 12, Y 10, Z 6

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Contribution per unit of limiting factor = Contribution per unit / Units of limiting factor required per unit Thus, X = 12 / 6 = 2, Y= 10 / 2 = 5, Z=6 / 1 = 6

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Step 4: Rank products ( make product with highest contribution per unit of limiting factor first)

Ranking: Z, Y, X

Step 5: Make products in rank order until scarce resources are used up

First 2000 units of Z should be made, then 2000 units of Y and finally with left machine hours X

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Linear programming is an operations research technique It can be used to decide on the optimum use of scarce resources.

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There must be a linear relationship between the factors.

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Step 1: Define the unknowns Step 2: Frame the constraints equation Step 3: State the objective functions Step 4: Graph the constraints Step 5: Graph objective function Step 6: Establishing feasible values for the unknowns

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Example

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Solution: Step 1

Let: x = number of units of X produced and sold during the year y= number of units of Y produced and sold during the year

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Objective is Maximise Contribution. So objective is: Maximise 15x + 25y

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2.5x + 5y 10000 2.5x + 5y = 10000 Put x = 0, then y = 2000 Y= 2000 If y= 0, x = 2.5x +0=10000, X= 4000 Draw the two points (0, 2000) and (4000, 0) on a graph to represent the line for labour constraint

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Y units

X units

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A Resource for ACCA Exam Preparation

Take any reasonable value of maximum contribution 15x + 25y = 37500 If x = 0, y = 1500 and If y = 0, x= 2500 To draw 15x + 25y =37,500 draw (0, 1500) and (2500,0) as the two points. NOTE: Any contribution line can be drawn. The purpose is only to establish the slope

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A Resource for ACCA Exam Preparation

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Method 1: Calculate the contribution earned at each point A, B and C.

Point A =15 * 0 + 25 * 2000=50000 Point B = 15 * 3000 +25 *500 =57,500 Point C = 15 * 3000 = $45000 Pont B gives maximum contribution

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Method 2: Slide the objective function line away from the origin to the furthest possible point

The optimal solution is B where sales constraint intersects labour constraint

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Algebraic Solutions

Optimal solutions can be arrived at using simultaneous equations instead of graphs.

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Example:

John manufactures garden chairs and armchairs. Each product passes through a cutting process and an assembling process. One garden chair makes a contribution of $50 and takes 6 hours cutting time and 4 hours assembly time. One armchair makes a contribution of $40 and takes 3 hours cutting time and 8 hours assembly time There is a maximum of 36 cutting hours available each week and 48 assembly hours Find the output that maximises contribution.

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A Resource for ACCA Exam Preparation

Solution

Let x = number of garden chairs produced each week Y= number of armchairsproduced each week Constraints are: 6x +3y =36 4x +8y =48 with x 0, y 0 Solving for x and y gives, x = 4 and y= 4 Thus maximum contribution = 4 x $50 + 4 X$40= $360

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Linear relationships must exist Only suitable when there is only one objective function It is assumed that variables are completely divisible Assumed that situation remains static in all respects

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