Product mix decisions with limiting factors

what two assumptions is the decision mix based on

• resources are at fixed levels

• costs can be accurately divided into their fixed and variable elements

limiting factors

resources that place constraints on output level (demand higher than output which can be produced)

e.g labour, machinery, scarce resources)

identifying optimum output with one constraints

step 1:

determine the contribution of all opportunities

eliminate those with a negative contribution

step 2:

establish contribution per unit of the limiting factor

rank by reference to this measure

step 3:

prioritise production according to ranking in step 2

produce highest ranked until market demand satisfied

then apply remainder of limiting factor to second-ranked output

contribution per unit of resource

contribution of one unit of a product / no. of units of resource required

objective of product mix with capacity constraints

to concentrate on those products/services that yield the largest contribution per limiting factor