### Effective Use of Resources

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

First find the limiting factor (bottleneck resource)

Rank the options using the contribution earned per unit of the scarce resource

Allocate resources

#### 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.

#### Illustration

X Ltd manufactures 3 products for which details are as follows:

Annual Demand for Product A is 4,000, and for B & C is 6,000 each

A | B | C | |

Selling price | $25 | $20 | $15 |

Materials | 7 | 6 | 5 |

Labour (@ 75c per hr) | 9 | 6 | 3 |

Variable overheads | 3 | 3 | 3 |

$19 | $15 | $11 | |

Contribution | $6 | $5 | $4 |

There are 90,000 labour hours available.

Determine the production schedule that will yield the maximum contribution per period.

Calculate the total contribution generated at this level of production.

Hours are the limiting factor as 120,000 are needed in total (with only 90,000) available

A | B | C | |
---|---|---|---|

Hours Needed per unit | 12 | 8 | 4 |

Contribution per unit | $6 | $5 | $4 |

Contribution Per hour | $0.5 | $0.625 | $1 |

Ranking | 3rd | 2nd | 1st |

Product | Units | Hrs | Total | Contribution |
---|---|---|---|---|

C | 6,000 | 4 | 24,000 | x $1 = 24,000 |

B | 6,000 | 8 | 48,000 | x $0.625 = 30,000 |

A | 1,500 | 12 | 18,000 | x $0.5 = 9,000 |