Determining the Optimal Production Plan re a single limiting factor

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Planning with one limiting factor

When there is only one scarce resource, key factor analysis can be used to solve the problem.

Options must be ranked using contribution earned per unit of the scarce resource.

Three steps in key factor analysis

  1. Step 1: - First determine the limiting factor (bottleneck resource)

  2. Step 2: - Rank the options using the contribution earned per unit of the scarce    resource

  3. Step 3: - Allocate resources

Product A Product B
SP / Unit 100 120
VC / Unit 80 75
FC / Unit 10 12
Skilled Labour / Unit 0.5 hr 0.75 hr
Demand (units) 5,000 4,000
How many labour hours are required?
Required: Product A (0.5 x 5000) 2,500
Required Product B (0.75 x 4000) 3,000
5,500
Available 4,000
Shortfall 1,500
Labour hours are a limiting factor

Product A Product B
SP / Unit 100 120
VC / Unit 80 75
Cont / Unit 20 45
Lab hrs / Unit 0.5 0.75
Cont / Lab hr 40 60
Ranking 2 1
Prod Plan
Product Units Lab Hrs / Unit Total Lab Hrs
Available = 4,000
Product B 4,000 0.75 (3,000)
Available 1,000
Product A 1,000/0.5 = 2,000 0.5 (1,000)
Available 0

Therefore, produce 2000 units of Product A and 4000 units of Product B

Assumptions

  1. A single quantifiable objective.  In reality, there may be multiple objectives.

  2. Each product always uses the same quantity of the scarce resource per unit.

  3. The contribution per unit is constant. However, the selling price may have to be lowered to sell more; discounts may be available as the quantity of materials needed increases.

  4. Products are independent. It may not be possible to prioritise product A at the expense of product B.

  5. We focus on the short term, therefore ignoring fixed costs.

NotesQuizPaper examCBEMock