Page 251 - BA2 Integrated Workbook STUDENT 2018

Short-term decision making

5.2 Calculating the optimum production plan

If an organisation is faced with a single limiting factor, for example labour hours, then
it must ensure that a production plan is established which maximises the profit from
the use of the available capacity. The profit-maximising production mix is known as
the optimal production plan.

The labour hours must be allocated to those products which earn the most
contribution per labour hour.

This decision rule can be stated as:
'maximising the contribution per unit of limiting factor’.

The optimal production plan is established as follows:

 Step 1 If not clearly given in the question, establish the single limiting factor.

 Step 2 Calculate the contribution per unit for each product.

 Step 3 Calculate the contribution per unit of limiting factor for each product.

Contribution per unit
–––––––––––––––––––––––––––––––––

Amount of limiting factor required per unit

 Step 4 Rank the products according to their contribution per unit of limiting
factor.

 Step 5 Allocate the limiting factor to the highest-ranking product.

 Step 6 Once the demand for the highest-ranking product is satisfied, move on
to the next highest-ranking product and so on until the (limiting factor) scarce
resource is used up.

Illustrations and further practice

Go through illustration 6

Try TYU 12

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