Achievers ACCA Devinda Weerasekara

Limiting Factor Analysis

WHAT IS A LIMITING FACTOR?

❖ A limiting factor is anything that will limit or restrict the company from achieving their
objectives.

❖ A limiting factor analysis will tell an organization of how to maximize profit when a
resource is limited.

TYPES OF LIMITING FACTORS

✓ Demand Constraints: Insufficient demand to achieve the desired profit.

✓ Resource Constraints: Insufficient resources to do the required production

STEPS IN DOING A LIMITING FACTOR CALCULATION

Example:

ABC Ltd makes three products, all of which use the same machine, which is available for 50,000 hours
per period. The unit costs of the product are:

Product A ($) Product B ($) Product C ($)

Direct materials 70 40 80

Direct labour:

Machinists ($8/hour) 48 32 56

Assemblers ($6/hour) 36 40 42

—— —— ——

Total variable cost 154 112 178

_____ ____ ____

Selling price per unit 200 158 224

Maximum demand (units) 3,000 2,500 5,000

Fixed costs are $300,000 per period.

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Achievers ACCA Devinda Weerasekara

Required:

(a) The deficiency in machine hours for the next period is____________ hours.

(b) The optimum production plan that will maximize ABC Ltd.’s profit for the next period is:

Product A _______________units Product B______________ units

Product C ________________units

STEP ONE-: IDENTIFY THE LIMITING FACTOR

STEP TWO-: CALCULATE THE CONTRIBUTION PER UNIT

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Achievers ACCA Devinda Weerasekara

STEP THREE-: CALCULATE THE CONTRIBUTION PER LIMITING FACTOR

STEP FOUR-: RANK THE PRODUCTS

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STEP FIVE-: ALLOCATE THE LIMITING FACTOR

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Achievers ACCA Devinda Weerasekara

Question One

The following budgeted information is available for a company that manufactures four types of specialist
paints:

Product W Product X Product Y Product Z

Per Batch Per Batch Per Batch Per Batch

$ $ $ $

Selling price 20.00 15.00 15.00 17.50

Variable overhead 9.60 6.00 9.60 8.50

Fixed overhead 3.60 3.00 2.10 2.10

——– ——– ——– ——–

Profit 6.80 6.00 3.30 6.90

——– ——– ——– ——–

Machine hours per batch 12 9 6 11

All four products use the same machine.

In a period when machine hours are in short supply, the product that makes the most profitable use of
machine hours is:

A. Product W
B. Product X
C. Product Y
D. Product Z

The following data relates to questions 2-3

A company manufactures three products, X, Y and Z. The sales demand and the standard unit selling
prices and costs for period 1, are estimated as follows:

X Y Z

Maximum demand (000 units) 4.0 5.5 7.0

$ per unit $ per unit $ per unit

Selling price 28 22 30

Variable costs:

Raw material ($1 per kg) 5 4 6

Direct labour ($12 per hour) 12 9 18

Page | 5 PM – Performance Management Limiting Factor Analysis

Achievers ACCA Devinda Weerasekara

Question Two

If supplies in period 1 are restricted to 90,000 kg of raw material and 18,000 hours of direct labour, the
limiting factor would be

A. Raw material
B. Direct Labour
C. Neither material nor labour
D. Both Material and labour

Question Three

In period 2, the company will have a shortage of raw materials, but no other resources will be restricted.
The standard selling prices and costs and the level of demand will remain unchanged.

In what order should the materials be allocated to the products if the company wants to maximize
profit?

First:

Second:

Third:

Question Four

A company manufactures and sells two products (X and Y) both of which require the same raw material.
For the coming period, the supply of material is limited to 5,000 kg. Data relating to each product are as
follows:

X Y

Selling price per unit $25 $46

Total variable cost per unit $15 $10

Material per unit (kg) 2.5 6

Maximum demand (units) per period 1,500 600

In order to maximize profit in the coming period, how many units of each product should the company
manufacture and sell?

A. 1,500 units of X and 208 units of Y B.

1,000 units of X and 417 units of Y
C. 1,500 units of X and 600 units of Y
D. 560 units of X and 600 units of Y

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