Limiting Factor

In: Business and Management

Submitted By joyce0328
Words 295
Pages 2
Limiting factor is defined as any factor which limits the activities of the organization. (http://articles.getacoder.com/Limiting_Factor_Analysis_628617x1191737768.htm, July 2010) The most common limiting factor is the sales volume because a company cannot sell the entire product it manufactures and this analysis help companies to identify bottleneck resources and use best combination of available resources to maximize profit as well as limiting factor in an organization or a company. (http://articles.getacoder.com/Limiting_Factor_Analysis_628617x1191737768.htm, July 2010) Examples of limiting factors are shortages of supply of a resource and a restriction on sales at a particular price which is depending on the circumstances of the case such as cash, raw materials, skilled labour, land and equipment as well. (http://business.fortunecity.com/discount/29/budg1.htm, July 2010) Let’s suppose raw material N is in short supply. For instance, Product A’s sales price is RM100 while Product B’s sales price is RM200.
Product A’s variable costs is RM50 while Product B’s variable cost is RM135
Contribution Per Unit, A is RM50 ; Contribution Per Unit, B is RM50
N used per unit of A is 10 Kg ; N used per unit of B is 20 Kg
Therefore: Contribution per Kg A is 50/10 = 5 whereas contribution per Kg B is 65/20 = 3.25
As you can see Product A Contribution per Kg is greater than that of Product B, so every effort should be made to produce as much units of Product A as possible. After producing all units of product if company still has some kg of raw material N, then it should utilize N to produce Product B. In short the Product is ranked according to Contribution per Kg in order to maximize profitability. (http://articles.getacoder.com/Limiting_Factor_Analysis_628617x1191737768.htm, July…...

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