Chapter 7: Limiting factor analysis

1. A business produces three products, Z1, Z2 and Z3. Each of these products requires different amounts of
material (material X), which is a scarce resource. The following budgeted data relates to the three products:

Match the products to the order in which they should be manufactured to ensure profit is maximised.

2. A company makes two products, X and Y, using the same type of direct labour. Production capacity per period
is restricted to 60,000 direct labour hours. The contribution per unit is $8 for Product X and $6 for Product Y.
The following constraints apply to production and sales:

The contribution-maximising output is to produce and sell 10,000 units of Product X and 2,500 units of Product
Y.
What is the shadow price per direct labour hour and for how many additional hours of labour does this shadow
price per hour apply?
A $1.50 per hour for the next 38,000 direct labour hours
B $1.50 per hour for the next 47,500 direct labour hours
C $1.60 per hour for the next 38,000 direct labour hours
D $1.60 per hour for the next 47,500 direct labour hours

3. In a linear programming problem to determine the contribution-maximising production and sales volumes for
two products, X and Y, the following information is available.

The profit-maximising level of output and sales is 3,000 units of Product X and 1,000 units of Product Y.
What is the shadow price of a direct labour hour?
A $1.00
B $2.40
C $4.00
D $4.50

4. Which TWO statements are true when using linear programming to solve production problems?
A If the aim is to minimise costs, the solution is where the total cost line touching the feasible area at a tangent
is as far away from the origin as possible.
B If the aim is to minimise costs, the solution is where the total cost line touching the feasible area at a tangent
is as close to the origin as possible.
 C If the aim is to maximise profit, the solution is where the total cost line touching the feasible area at a tangent
is as far away from the origin as possible.
D If the aim is to maximise profit, the solution is where the total contribution line touching the feasible area at a
tangent is as close to the origin as possible.
E If the aim is to maximise profit, the solution is where the total contribution line touching the feasible area at a
tangent is as far away from the origin as possible.

5. Which of the following statements about graphical linear programming with the objective of maximising profit
is true?
(1) If a resource constraint line does not pass through the optimum point on the graph, then the shadow price of
that resource is zero
(2) The shadow price is the maximum amount a company should pay for one more unit of a scarce resource
(3) The slope or gradient of the objective function depends on the amount of resources available to the
organisation
A 1 only
B 1 and 2 only
C 1, 2 and 3
D 2 and 3 only

6. A company uses linear programming to decide on the production and sales budget that will maximise total
contribution and profit for a financial period. The optimal solution involves using all available direct labour
hours, for which the shadow price is $4.50 per hour, and machine hours, for which the shadow price is $3 per
machine hour. Direct labour is paid $8 per hour.
If the objective of the company is to maximise total contribution and profit in each period, how much should the
company be willing to pay per hour to obtain additional direct labour hours of production capacity?

A Up to but not including $4.50

B Up to but not including $9.50
C Up to but not including $12.50
D Up to but not including $15.50

7. A company has the following production planned for the next four weeks. The figures reflect the full capacity
level of operations. Planned output is equal to the maximum demand per product.

The direct labour force is threatening to go on strike for two weeks out of the coming four. This means that only
2,160 hours will be available for production, rather than the usual 4,320 hours.
If the strike goes ahead, which product or products should be produced if profits are to be maximised? Place a
tick in the boxes in the table below as appropriate.
8. An organisation has the following contribution function:
Contribution = 5X + 10Y
where
X = the number of units of product X produced, and
Y = the number of units of product Y produced.
A graph has identified that the optimal production plan exists at the point where the following two constraints
cross:
Skilled labour: 6X + 4Y ≤ 62,000
Unskilled labour: 2X + 5Y ≤ 50,000
There is a maximum demand of 12,000 units of each product.
What is the number of units of Product Y produced in order to maximise contribution (to the nearest whole
unit)?

9. A jewellery company makes rings (R) and necklaces (N).

The resources available to the company have been analysed and two constraints have been identified:

The management accountant has used linear programming to determine that R = 500 and N = 400.
Which of the following is/are slack resources?
(1) Labour time available
(2) Machine time available
A (1) only
B (2) only
C Both (1) and (2)
D Neither (1) nor (2)

10. Q plc makes two products – Quone and Qutwo – from the same raw material. The selling price and cost details
of these products are as shown below:

The maximum demand for these products is 500 units per week for Quone, and an unlimited number of units
per week for Qutwo.
What is the shadow price of these materials, if material were limited to 2,000 kgs per week?
• $nil
 • $2.00 per kg
• $2.66 per kg
• $3.40 per kg

11. The shadow price of skilled labour for CBV is currently $8 per hour. What does this mean?
A The cost of obtaining additional skilled labour resources is $8 per hour
B There is a hidden cost of $8 for each hour of skilled labour actively worked
C Contribution will be increased by $8 per hour for each extra hour of skilled labour that can be obtained
D Total costs will be reduced by $8 for each additional hour of skilled labour that can be obtained

12. The following details relate to three services provided by RST Company:

All three services use the same type of direct labour which is paid $25 per hour.
The fixed overheads are general fixed overheads that have been absorbed on the basis of machine hours.
What are the most and least profitable uses of direct labour, a scarce resource?

13. A linear programming model has been formulated for two products, X and Y. The objective function is depicted
by the formula C = 5X + 6Y, where C = contribution, X = the number of product X to be produced and Y = the
number of product Y to be produced.
Each unit of X uses 2 kg of material Z and each unit of Y uses 3 kg of material Z. The standard cost of material Z
is $2 per kg.
The shadow price for material Z has been worked out and found to be $2.80 per kg.
If an extra 20 kg of material Z becomes available at $2 per kg, what will the maximum increase in contribution
be?
A Increase of $96
B Increase of $56
C Increase of $16
D No change

14. An organisation has the following contribution function:

Contribution = 12A + 8B, where
A = the number of units of product A produced, and
B = the number of units of product B produced.
A graph has identified that the optimal production plan exists at the point where the following two constraints
cross:
Material X: A + 2B ≤ 8,000
Material Y: 2A + B ≤ 13,000
There is a maximum demand of 10,000 units of each product.
How many units of Product A are produced in order to maximise contribution?
A0
B 1,000
C 6,000
D 10,000
15. An organisation has graphed the following linear programming model:

All constraints have less than or equal to constraints.

What is the maximum number of units of Product B which can be produced?

16. An organisation has created the following linear programming solution to represent the position it faces
currently in the presence of short term scarce resources:

Note: DL = Direct labour hours

The point marked B has been determined to be the point which provides the optimal production plan.
Which of the following resources will have a shadow price greater than 0? (select all that apply)
• Direct labour hours
• Material A
• Material B
• Machine hours
Section B

Metallica Co

The following scenario relates to questions 15 -19.

Metallica Co is an engineering company that manufactures a number of products, using a team of highly skilled
workers and a variety of different metals. A supplier has informed Metallica Co that the amount of M1, one of the
materials used in production, will be limited for the next three-month period.

The only items manufactured using M1 and their production costs and selling prices (where applicable) are shown
below.

* Material M1 is expected to be limited in supply during the next three months. These costs are based on M1
continuing to be available at a price of $20 per square metre. The price of M2 is $10 per square metre.

Required

17. What is the contribution per unit for each product?

18. Metallica Co carried out some market research which suggested that a change should be made to the selling
price of both Product P4 and P6. As a result, the new contribution per unit for P4 is $85 and for P6 it is $95.
Which of the following answers is correct?
A The contribution per limiting factor of P4 and P6 is $85 and $47.50 respectively, therefore P4 should be
produced first.
B The contribution per limiting factor of P4 and P6 is $113.33 and $190 respectively, therefore P6 should be
produced first.
C The contribution per limiting factor of P4 and P6 is $85 and $47.50 respectively, therefore P6 should be
produced first.
D The contribution per limiting factor of P4 and P6 is $113.33 and $190 respectively, therefore P4 should be
produced first.

19. Indicate, by selecting the relevant boxes in the table below, whether each of the following costs would be
included in the calculation of throughput contribution if Metallica Co operated in a throughput accounting
environment.
20. Indicate, by selecting the relevant boxes in the table below, which of the following constraints would
necessitate the performance of limiting factor analysis by Metallica Co.

21. Once a scarce resource is identified, Metallica Co carries out a limiting factor analysis using four steps. Match
each of the steps to the correct order in which they should be carried out.
Section C questions

22. Cut and stitch – BPP (6/10)