AAT Level 3 Limiting Factors

Objectives 1. Explain what production decisions are required when resources are scarce 2. State the steps to calculate limiting factors 3. Calculate limiting factors 4. Complete past standard exam questions on limiting factors

What would you pay first if money was short?

What shortages might a manufacturing company experience? Materials Labour Hours Machine Hours Storage Space

VC £20 VC £45VC £135 £50£70£150 Contribution £30 Contribution £25 Contribution £15 Labour Hours 4 Labour Hours 2.5 Labour Hours 3

How would we decide where to allocate a scarce resource? Calculate the contribution per unit Which product will provide the highest contribution to Fixed Costs & Profit? Allocate the resources accordingly

Steps to deal with limited resources 1.Calculate the contribution per unit 2.Calculate the quantity per limited factor 3.Calculate the contribution per limiting factor 4.Rank the components 5.Determine Production Levels 6.Calculate Profit

Steps 1.Calculate the contribution per unit Contribution = Selling Price - Variable Costs =£40- £30 Contribution =£10

Steps 2. Calculate the contribution per limiting factor e.g. Contribution is £10 per unit, and each unit requires 2 hours. Contribution per hour is £5

Steps 3. Rank the components The highest contribution 1st

Steps 4. Determine Production Levels (based on highest contribution & demand) Remember! You can only manufacture up to the maximum demand!

Steps 5.Calculate Profit Based on your production schedule.

Question 1 - Blakes ComponentABC Selling price (per unit)£39.00£51.00£39.00 Annual demand (units) Cost of materials£6.80£4.90£7.10 Direct labour hours (per unit)242 Machine hours (per unit) What information have we got? Limited labour hours 600,000 Fixed costs £150,000

Activity 1 - Blakes 1. Calculate the contribution per unit Contribution = Selling Price – Variable Costs ComponentABC Selling Price (£) Less Variable Costs Direct Materials Direct Labour Variable OH (Machine Hours) Total variable costs per unit Contribution per unit x 8 = 16 4 x 8 = 32 2 x 8 = x 10 = x 10 = – = £ – = £ – = 0.90p = = = 38.10

2. Contribution per limiting factor Contribution per unit STEP 2: Contribution per hour of limiting factor STEP 3: Rank £1.20 £ p What is the limiting factor? Labour limited to 600,000 hours How can we spend these hours to maximise profit? Each unit of A needs 2 hours Contribution per limiting factor is: 1.20 ÷ 2 = 60p Each unit of B needs 4 hours Contribution per limiting factor is: 1.60 ÷ 4 = 40p Each unit C needs 2 hours Contribution per limiting factor is: 90p ÷ 2 = 45p 1 32

4. Production Schedule Labour hours available600,000 Produce: A Balance of labour hours available Produce: C Balance of labour hours available Produce: B Check the demand! 50,000 units x 2 hours 100, , ,000 x 2 hours 200, , ÷ 4 = 75,000 units 0 Check to see how many hours are available Workout how many units you can make with the remaining hours

b. What future problems may you have with this schedule?

c. Calculate the profit made under restricted labour hours ABC Selling Price per unit (£) Variable costs per unit (£) Contribution per unit (£) nos units (components) produced Total contribution per component type (£) Total contribution (£) Less Fixed costs (£) Profit (£) ,000 75, ,000 60, ,000 90, , , ,000

Contribution/Sales % Shows the Contribution as a proportion of Sales income

Contribution/Sales % ABC Cont per unit Selling price per unit C/S ratio (state to two decimal places)

Contribution/Sales % ABC Cont per unit Selling price per unit C/S ratio (state to two decimal places)

Contribution/Sales % ABC Cont per unit Selling price per unit C/S ratio (state to two decimal places)

Contribution/Sales % ABC Cont per unit Selling price per unit C/S ratio (state to two decimal places)

Contribution/Sales % ABC Cont per unit Selling price per unit C/S ratio (state to two decimal places) 1.20 ÷ 39 x 100 = 3.1%

Contribution/Sales % ABC Cont per unit Selling price per unit C/S ratio (state to two decimal places) 1.20 ÷ 39 x 100 = 3.1% 1.60 ÷ 51 x 100 = 3.14%

Contribution/Sales % ABC Cont per unit Selling price per unit C/S ratio (state to two decimal places) 1.20 ÷ 39 x 100 = 3.1% 1.60 ÷ 51 x 100 = 3.14% 0.90 ÷ 39 X 100 = 2.31%

Contribution/Sales % ABC Cont per unit Selling price per unit C/S ratio (state to two decimal places) 1.20 ÷ 39 x 100 = 3.1% 1.60 ÷ 51 x 100 = 3.14% 0.90 ÷ 39 X 100 = 2.31%

Practice activities