How to find the optimum production plan
In the video, the Kaplan tutor goes through an example so you can see how limiting factor analysis works in context and how it informs a production plan.
In the example, a company called Lynch ltd is making two products:
- Dolly, which will sell for £10.00 and requires 1kg material per unit
- Teddy, which will sell for £25.00 and requires 2kg per unit.
Lynch require 2,500kg of materials to meet the demand of 500 units of Dolly and 1,000 units of Teddy. However, they only have 2,000kg.
The table below explains the results of completing the limiting factor analysis:
| Teddy | Dolly | |
|---|---|---|
| Selling price | £25.00 | £10.00 |
| Variable cost | £18.00 | £5.50 |
| Contribution | £7.00 | £4.50 |
| Limiting factor | 2kg | 1kg |
| Contribution per limiting factor | £3.50 | £4.50 |
| Rank | 2 | 1 |
Now that Lynch ltd know the dolly will make them more contribution per limiting factor, they can create a production plan based on this. They can use 550kg material to produce 500 Dollys. This would make them a contribution of £2,250.
With the remaining 1,500kg of material they could make 750 Teddies which would make them £5,250 for a total contribution of £7,500.
Budgeting: How to Prepare a Cash and Functional Budget
Budgeting: How to Prepare a Cash and Functional Budget
