CIMA BA2 Syllabus D. DECISION MAKING - Limiting Factors With One Scarce Resource - Notes 4 / 4
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
Illustration - Limiting Factor - Materials
| Product A | Product B | Product C | |
|---|---|---|---|
| Sales price | 100 | 200 | 300 |
| Direct Materials | 30 | 80 | 150 |
| Direct Labour | 25 | 50 | 75 |
| Contribution | 45 | 70 | 75 |
| Contribution per Limiting Factor | = 45/30 x 100% = 150% | =70/80 x 100% = 87.5% | =75/150 x 100% = 50% |
| Order of Production | First - make as many as will sell | Second, after A is produced | Third, after A and B are produced |