Performance Management – ACCA (F5)

LIMITING FACTORS – LINEAR PROGRAMMING

Linear Programming If there are two or more scarce resources then we are unable to use the Key Factor
approach. Instead, we must use Linear Programming.

The steps are as follows:

(1) Define the unknowns in terms of symbols
(2) Formulate equations for the constraints
(3) Formulate an equation for the objective
(4) Graph the constraints and the objective
(5) Find the optimum solution

EXAMPLE 01

A profit-seeking firm has two constraints:

Labour is limited to 16,000 hours, and materials are limited to 15,000kg.

The firm manufactures and sells two products, X and Y.

To make X, the firm uses three kgs of material and four hours of labour, whereas to make Y, the firm
uses five kgs of material and four hours of labour.

The contribution per unit made by each product are $30 for X and $40 for Y.

The cost of materials is normally $8 per kg, and the labour rate is $10 per hour

Optimal production plan & Shadow Price ?

QUESTION 01
Peter makes two types of chair – the ‘Executive’ and the ‘Standard’.
The data relating to each as follows:
Standard Executive
Materials 2 kg 4 kg
Labour 5 hours 6 hours
Contribution $6 $9
There is a maximum of 80 kg of material available each week and 180 labour hours per week.
Demand for ‘Standard’ chairs is unlimited, but maximum weekly demand for ‘Executive’ chairs is 10.
Find the optimal production plan and the maximum contribution that this will generate.

Spare capacity
If the optimum solution results in using less that the maximum available of a particular resource, then
we have spare capacity of that resource or slack.

Question 2
Using the information from example 1,

Compiled by: Mohammad Faizan Farooq

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Performance Management – ACCA (F5)
Calculate the slack for each of the constraints i.e. for materials, for labour, and for demand for
‘Executive’ chairs.

Shadow prices
In real life there are unlikely to be any truly limited resources – it will almost always be possible to get
more, but we are likely to have to pay a premium for it. For example, the supply of labour may be
limited by the length of the normal working week, but we can get more hours if we are prepared to pay
overtime.
The shadow price (also known as the dual price) of a limited resource is the most extra that we would be
prepared to pay for one extra unit of the limited resource. We calculate it by calculating the extra profit
that would result if we have one extra unit of the limited resource.

Question 3
Using the information from example 1, calculate the shadow price of each of the constraints i.e. for
materials, for labour, and for demand for ‘Executive’ chairs.

Compiled by: Mohammad Faizan Farooq

Contact: [email protected]
0092-334-3440590
Performance Management – ACCA (F5)
Question 01
The demand curve for a product is expressed by the formula P = 24 – 0.004Q, where P is the selling price
and Q is the quantity demanded per week at that price. At the current sales price of $10 per unit,
demand per week is 3,500 units.
By how much could the company raise the selling price per unit in order to increase total sales revenue
per week, before total sales revenue per week from the product begins to go into decline?
A By $2 per unit. B By $4 per unit
C By $10 per unit D By $12 per unit

Question 02
The following statements have been made about linear programming analysis.
(1) The sales price of units produced and sold may be a constraint in a linear programming problem.
(2) If a constraint is 0.04x + 0.03y  2,400, the boundary line for the constraint can be drawn on a graph
by joining up the points x = 80,000 and y = 60,000 with a straight line.
Which of the above statements is/are true?
A 1 only B 2 only C Neither 1 nor 2. D Both 1 and 2

Question 03
Production output by a manufacturing company is restricted by a shortage of supplies of Material X and
skilled labour Y. Material X costs $10 per kilogram.
It has been determined using linear programming that at the profit-maximising level of output, all
available quantities of Material X would be fully utilised and the shadow price (dual price) of Material X
would be $6 per kilogram. Skilled labour Y has a shadow price of $0, but existing staff would be willing to
work overtime for an additional $2 per hour.
Another supplier has now offered to supply additional quantities of Material X, but at a price of $14 per
kilogram.
Would the company increase profits by (1) purchasing Material X at the higher price or (2) employing
skilled labour Y to work overtime?
Buy extra Material X Pay labour Y to work overtime
A No Yes
B No No
C Yes Yes
D Yes No.

Compiled by: Mohammad Faizan Farooq

Contact: [email protected]
0092-334-3440590
Performance Management – ACCA (F5)
Question 04
The constraints in a linear programming problem are as follows:
3x + 4.8y  120,000 (Grade A labour hours)
5x + 4y  160,000 (Grade B labour hours)
x  30,000 (Sales demand product X)
y  20,000 (Sales demand Product Y)
x, y ≥ 0
The objective function is to maximise total contribution: 20x + 30y. A graph of the constraints is as follows.

Where is the optimal solution to the linear programming problem?

A Point A B Point B C Point C. D Point D

Question 05
The following statements have been made about solving linear programming problems for budgeting purposes.
(1) Slack occurs when less than the maximum available of a limited resource is required.
(2) When the linear programming problem includes a constraint for minimum sales demand for a product, there
may be a surplus for sales demand in the optimal solution.
Which of the above statements is/are true?
A 1 only B 2 only C Neither 1 nor 2. D Both 1 and 2.

Question 06
The following statements have been made about solving linear programming problems for budgeting purposes
using the graphical method.
(1) When the objective function is to minimise total variable costs, the optimal solution is at the point where an
iso-cost line touches the feasible region at a point nearest to the origin of the graph.
(2) A constraint that may have an effect on the optimal solution is show by a line on the graph that helps to
determine the shape of the feasible region.
Which of the above statements is/are true?
A 1 only B 2 only C Neither 1 nor 2 D Both 1 and 2.

Compiled by: Mohammad Faizan Farooq

Contact: [email protected]
0092-334-3440590
Performance Management – ACCA (F5)
Question 07
In a linear programming problem to determine the contribution-maximising production and sales volumes for
two products, X and Y, the following information is available.
Product X Product Y Total available
per unit per unit per period

Direct labour hours 2 hours 4 hours 10,000 hours

Material X 4 kg 2 kg 14,000 kg
Contribution per unit $12 $18
The profit-maximising level of output and sales is 3,000 units of Product X and 1,000 units of Product Y.
What is the shadow price of a direct labour hour?
A $1.00 B $2.40 C $4.00. D $4.50

Question 08
A company uses linear programming to decide on the production and sales budget that will maximise total
contribution and profit for a financial period. The optimal solution involves using all available direct labour
hours, for which the shadow price is $4.50 per hour, and machine hours, for which the shadow price is $3 per
machine hour. Direct labour is paid $8 per hour.
If the objective of the company is to maximise total contribution and profit in each period, how much should the
company be willing to pay per hour to obtain additional direct labour hours of production capacity?
A Up to but not including $4.50
B Up to but not including $9.50
C Up to but not including $12.50.
D Up to but not including $15.50

Compiled by: Mohammad Faizan Farooq

Contact: [email protected]
0092-334-3440590
Performance Management – ACCA (F5)
Question 09
Cut and Stitch (CS) make two types of suits using skilled tailors (labour) and a delicate and unique fabric
(material). Both the tailors and the fabric are in short supply and so the accountant at CS has correctly produced
a linear programming model to help decide the optimal production mix.
The model is as follows:

Variables:
Let W = the number of work suits produced
Let L = the number of lounge suits produced

Constraints Tailors’ time:

7W + 5L ≤ 3,500 (hours) – this is line T on the diagram
Fabric: 2W + 2L ≤ 1,200 (metres) – this is line F on the diagram
Production of work suits: W ≤ 400 – this is line P on the diagram
Objective is to maximise contribution subject to:
C = 48W + 40L
On the diagram provided the accountant has correctly identified OABCD as the feasible region and point B as the
optimal point.

Required: Find by appropriate calculation the optimal production mix and related maximum contribution that
could be earned by CS and Calculate the shadow prices of the fabric per metre and the tailor time per hour.

Compiled by: Mohammad Faizan Farooq

Contact: [email protected]
0092-334-3440590
Performance Management – ACCA (F5)
Question 10
Higgins Co (HC) manufactures and sells pool cues and snooker cues. The cues both use the same type of good
quality wood (ash) which can be difficult to source in sufficient quantity. The supply of ash is restricted to 5,400
kg per period. Ash costs $40 per kg.
The cues are made by skilled craftsmen (highly skilled labour) who are well known for their workmanship. The
skilled craftsmen take years to train and are difficult to recruit. HC's craftsmen are generally only able to work
for 12,000 hours in a period. The craftsmen are paid $18 per hour.
HC sells the cues to a large market. Demand for the cues is strong, and in any period, up to 15,000 pool cues and
12,000 snooker cues could be sold. The selling price for pool cues is $41 and the selling price for snooker cues is
$69.
Manufacturing details for the two products are as follows:
Pool cues Snooker cues
Craftsmen time per cue 0.5 hours 0.75 hours
Ash per cue 270 g 270 g
Other variable costs per cue $1.20 $4.70
The contribution per unit is $20 for pool cues and $40 per unit for snooker cues.

HC does not keep inventory.

Required
(a) Determine the optimal production plan for a typical period assuming that HC is seeking to maximise the
contribution earned. You should use a linear programming graph, identify the feasible region and the optimal
point and accurately calculate the maximum contribution that could be earned using whichever equations you
need.
(b) Explain the meaning of a shadow price (dual price) and calculate the shadow price of both the labour
(craftsmen) and the materials (ash).

Compiled by: Mohammad Faizan Farooq

Contact: [email protected]
0092-334-3440590
Performance Management – ACCA (F5)
Question 11
The Cosmetic Co is a company producing a variety of cosmetic creams and lotions. The creams and lotions are
sold to a variety of retailers at a price of $23.20 for each jar of face cream and $16.80 for each bottle of body
lotion. Each of the products has a variety of ingredients, with the key ones being silk powder, silk amino acids
and aloe vera. Six months ago, silk worms were attacked by disease causing a huge reduction in the availability
of silk powder and silk amino acids. The Cosmetic Co had to dramatically reduce production and make part of its
workforce, which it had trained over a number of years, redundant.

The company now wants to increase production again by ensuring that it uses the limited ingredients available
to maximise profits by selling the optimum mix of creams and lotions. Due to the redundancies made earlier in
the year, supply of skilled labour is now limited in the short-term to 160 hours (9,600 minutes) per week,
although unskilled labour is unlimited. The purchasing manager is confident that they can obtain 5,000 grams of
silk powder and 1,600 grams of silk amino acids per week. All other ingredients are unlimited. The following
information is available for the two products:

Cream Lotion
Materials required:
– silk powder (at $2.20 per gram) 3 grams 2 grams
– Silk amino acids (at $0.80 per gram) 1 gram 0.5 grams
– Aloe vera (at $1.40 per gram) 4 grams 2 grams
Labour required: skilled ($12 per hour) 4 minutes 5 minutes
– Unskilled (at $8 per hour) 3 minutes 1.5 minutes

Each jar of cream sold generates a contribution of $9 per unit, whilst each bottle of lotion generates a
contribution of $8 per unit. The maximum demand for lotions is 2,000 bottles per week, although demand for
creams is unlimited. Fixed costs total $1,800 per week. The company does not keep inventory although if a
product is partially complete at the end of one week, its production will be completed in the following week.

Required
(a) On the graph paper provided, use linear programming to calculate the optimum number of each product that
the Cosmetic Co should make per week, assuming that it wishes to maximise contribution. Calculate the total
contribution per week for the new production plan. All workings must be rounded to two decimal places.

(b) Calculate the shadow price for silk powder and the slack for silk amino acids. All workings must be rounded
to two decimal places.

Compiled by: Mohammad Faizan Farooq

Contact: [email protected]
0092-334-3440590