Paper F2, Management Accounting Lecture by: Mr.

Farrukh Abbas

1-Page | 27
th
of May 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com
Multiple Limiting Factor:

To identify the optimal production plan in case of multiple limiting factors, Linear Programming is used.

Step 1: Identify the unknowns

Step 2: Identify and formulate the Objective Functions. They can be of two types

- Contribution Maximization
- Cost Minimization

Normally Contribution Maximization is considered unless its mentioned otherwise.

Step 3: Identify and formulate the Constraints. They can be of Material, Labor, Maximum Demand, Minimum
Demand & Constraint of Non-Negativity

Step 4: Plot the given data on a graph

Step 5: Identify the physical region.

- If an objective is to maximize the contribution the feasible region will be towards the origin.
- If objective is to minimize the costs, the feasible region will be away from the region.

Step 6: Identify the optimal production plan.


Example:

A business makes and sells two products,





10,000Kg of Material & 12,000 Hours of Labor are available.
Max Demand for product A is 5000 Units & Minimum Demand
of Product B is 1000 Units. Identify the Optimal Production Plan
when objective is to Maximize Contribution?



Solution:

Let the unit of A = x
Let the unit of B = y

Total Contribution = Contribution from A + Contribution for B
C = (Contribution/Unit of A x Units of A) + (Contribution/Unit of B x Units of B)
C = (50 x x) + (60 x y)
C = 50x + 60y



A B
Selling Price $80 $100
Material
Usage/Unit 2Kg 5Kg
Rate $5, Cost $10 $25
Labor
Hours/Unit 4hrs 3hrs
Rate $5, Cost $20 $15
Paper F2, Management Accounting Lecture by: Mr. Farrukh Abbas

2-Page | 27
th
of May 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com

Constraint 1: Material

Material used for A + Material used for B 10,000
(Units of A x usage/unit) + (Units of B x usage/unit) 10,000
(x x 2kg) + (y x 5kg) 10,000

2x + 5y 10,000

Constraint 2: Labor

Hours used for A + Hours used for B 12,000
(Units of A x hrs/unit) + (Units of B x hrs/unit) 12,000
(x x 4) + (y x 3) 12,000

4x + 3y 12,000

Constraint 3: Maximum Demand

x 5,000

Constraint 4: Minimum Demand

y 1,000

Let assume,

In Constraint 1: In Constraint 2:

2x + 5y 10,000 4x + 3y 12,000
x = 0 then, x = 0 then,
2(0) + 5y 10,000 4(0) + 3y 12,000
0 + 5y 10,000 0 + 3y 12,000
y 10,000/5 y 12,000/3

y 2,000 y 4,000


2x + 5y 10,000 4x + 3y 12,000
y = 0 then, y = 0 then,
2x + 5(0) 10,000 4x + 3(0) 12,000
2x + 0 10,000 4x + 0 12,000
x 10,000/2 x 12,000/4

x 5,000 x 3,000








Paper F2, Management Accounting Lecture by: Mr. Farrukh Abbas

3-Page | 27
th
of May 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com



So

At Point A, x=0 y=1000

At Point B, x=0 y=2000

At Point C,
Constraint 1 and Constraint 2 are intersecting so,

Constraint 1 Constraint 2
2x + 5y = 10,000 4x + 3y = 12,000

To make Constraint 1 equal to Constraint 2, Multiple it with 2

So,

2(2x + 5y = 10,000) 4x + 3y = 12,000
4x + 10y = 20,000 4x + 3y = 12,000

Now subtract Constraint 2 from Constraint 1,

4x + 10y = 20,000
(4x + 3y = 12,000)

7y = 8000
y = 8000/7
y = 1143

Now put the value of y in Constraint 1

2x + 5y = 10,000
2x + 5(1143) = 10,000
2x + 5715 = 10,000
0
1000
2000
3000
4000
5000
0 1000 2000 3000 4000 5000 6000
Constraint 1
Constraint 2
Constraint 3
Constraint 4
A
B
C
D
Paper F2, Management Accounting Lecture by: Mr. Farrukh Abbas

4-Page | 27
th
of May 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com
2x = 10,000-5715
x = 4285/2
x = 2143

So,
At Point C, x=2143 y=1143

Now,
At Point D,
Constraint 2 and Constraint 4 are intersecting so,

Put the value of y from Constraint 4 in Constraint 2,

4x + 3y = 12,000
4x + 3(1000) = 12,000
4x + 3000 = 12,000
4x = 12,000 - 3000
x = 9000/4
x = 2250

At Point D, x=2250 y=1000

Optimal Production Plan

C = 50x + 60y

At Point A,

C = 50(0) + 60(1000)
= 60,000

At Point B,

C = 50(0) + 60(2000)
= 120,000

At Point C,

C = 50(2143) + 60(1143)
= 175,730
At Point D,

C = 50(2250) + 60(1000)
= 172,500

So The Maximum Contribution is at Point C and it will be the Optimal Production Plan