(a) Explain what a limiting factor is and what sort of things can become limiting factors in a business situation?

(16 marks)

Limiting factor is any factor that restricts a company or an organisation’s activities. In other words, limiting factor is a factor which is limited or not enough provide to the company. Limiting factors in an organisation can be labour hours, raw material, machine hours or space. For example, when sales demand excess the productivity capacity, the company do not have enough resources to produce the products, the scarce resource will be the factor that restricts the company’s activities. Hence, the scarce resources should be identified to ensure company has enough resources to produce their products as many as their wish. By using limiting factor, we can maximise the profit when obtained the greatest possible contribution to profit each time.

Example1:

A

B

C

Contribution per unit of output

RM 24

RM 20

RM 12

Machine hours required per unit of output

6 hours

2 hours

1 hours

Estimated sales demand

3,000 units

3,000 units

3,000 units

Required machine hours

18,000 hours

6,000 hours

3,000 hours

The machine hour is limited to 18,000 hours for the period because of the breakdown of one machine.

Consider Example 1.

From the example 1, we know that the company required total 27,000 machine hours to produce the total sales demand of the product A, B and C that they estimated. However, the company only has 18,000 machine hours for the period because of the breakdown of one machine. In this situation, company’s activities are limited by the machine hours. When we looking at the above information, we will think that the company should produce the product A first since the contribution per unit of product A is the highest, but this could be wrong. This is because produce each unit of product A required 6 machine hours, but product B required 2 machine hours and product C required 1 machine hours only. So, the company can produce 3,000 units of product B and C respectively first, after that just produce the product A with the remaining machine hours. In other words, if the company concentrates on produce the product A, there will no machine hours left to the company to produce B and C. In order to maximize the company’s profit, we should use limiting factor to calculate the greatest possible contribution per profit for each product and rank the profitability of the product to obtain the optimum production plan.

(b) Explain the techniques that have been developed to assist in business decision- making when single or multiple limiting factors are encountered

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(16 marks)

Single limiting factor- Limiting factor analysis

When single limiting factor are encountered, we have to use limiting factor analysis to help companies to identify the scarce resources and maximise profit by using the best combination of available resources. In limiting factor analysis, we should identify the bottleneck resources first. Secondly, we should calculate the contribution per unit for each product. Next, we can calculate the contribution per unit of the bottleneck resource for each product after we get the contribution per unit of each product. After this, we can rank the products from the highest to the lowest in sequence based on contribution per unit of bottleneck resource. Finally, we can allocate the resources from the highest contribution per profit to the lowest contribution per profit by the ranking until the resources are used up. By doing so, we can obtained the greatest possible profit when resources are limited by single limiting factor.

Example 2:

X

Y

Machine hours per units