Limiting factor question help? (FP)

Evening folks,

In the second screen shot the answer to E is right (i copied it from answer sheet ) but i don't understand the theory as to why it is correct?

If anyone could help me understand would be very grateful



  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    This is the second question I've seen you post which is based on you looking at a sample exam answer. You are not alone, but I think you have made a mistake. You should master the limiting factor technique first, then attempt the questions. I can't stop you but I can warn you that your approach is one of learning to answer exam questions not one of understanding a topic that could be examined in a multitude of different ways.

    The cost per kg at £400 enables Alpha to make a contribution of £200 per Tig and £180 per Tag. Your optimal production mix is 200 Tigs and 240 Tags. The maximum sales are 200 Tigs and 300 Tags. So you can't sell any more Tigs, but you could sell up to 60 more Tags. If you bought 7.5 kilograms of material that would enable you to make one more Tag.

    The 241st Tag would bring in sales revenue of Tn£4,950
    And would incur costs:
    The 241st g would bringmaterials 7.5 x £500 Tn(£3,750)
    The 241st Tag ng inven labour Tnhhhmatehhhhhh(£600)
    The 241st Tag ould bial total variable cost Tmnn(£4,350)
    The 241st Tag uld brinlsLeaving a contribution of Tn£600
    Which is equivalent to £80 per kilogram needed
    In other words the £100 premium will decrease the contribution but Alpha will still make £80 per kg (£600 per Tag) if they buy the extra kgs of material.

    This hasn't been asked in the question here (and I hope you've studied the subject so that you know it), but I'll add:
    The premium above the £400 per kg price, at which Alpha would no longer be interested in buying kgs of material is £180. At £180 the extra cost of the material is so high it leaves no contribution for Alpha, so it is not worth making any more. The £180 + the £400 gives this value = £580. In many texts this is called the shaddow price.
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  • topcat
    topcat Registered Posts: 452
    Hi Sandy,

    I agree about the learning part i had gone through the book cover to cover and the questions and thought i knew everything so gave it a shot. Think i need a little more work in some areas after doing this practice paper before attempting the second one.

    Thank you for that perfect explanation there really helped a lot :thumbup1:

    Although the shaddow price is not mentioned anywhere in my book just checked through the chapter on this and in the index , so thanks for for pointing the extra bit out ill go and do some research on google
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