ACCA PM Syllabus C. Decision-making Techniques - Determining the Optimal Production Plan re a single limiting factor - Notes 2 / 5
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
Step 1: - First determine the limiting factor (bottleneck resource)
Step 2: - Rank the options using the contribution earned per unit of the scarce resource
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
A single quantifiable objective. In reality, there may be multiple objectives.
Each product always uses the same quantity of the scarce resource per unit.
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.
Products are independent. It may not be possible to prioritise product A at the expense of product B.
We focus on the short term, therefore ignoring fixed costs.