Accounting Lecture 10

• Decisions on Product Mix with Limiting Factors

  • The decision model is based on two assumptions (reasonable in the short run):
  • Resources are at a fixed level
  • 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)
• Problem


  How much of which products to make?
• Optimum output schedule


  That which maximises contribution (and thus profits)
• Identifying optimum output with one constraint

  1. Determine the contribution of all opportunities

  2. Eliminate those with a negative contribution

  3. Establish contribution per unit of the limiting factor

  4. Rank by reference to this measure

  5. Prioritise production according to ranking, produce highest ranked until market demand satisfied, then apply remainder of limiting factor to second-ranked output etc.
• Product mix with capacity constraints

  The objective is to concentrate on those products/services that yield the largest contribution per limiting factor
• Contribution per unit is already indicated, they are all positive, none of the opportunities should be eliminated
• What is the contribution per unit of limiting factor? Rank opportunities by contribution per unit of limiting factor