A limiting factor may be defined as ‘any factor, which has a limiting effect on the activities of an undertaking at a point in time over a specific period’
The decision-making strategy, which managements wish to pursue, may be constrained because of shortage of manpower, machinery, material, money, markets or a combination of these. It may also be affected by the availability of management expertise and methods improvement capability.
In short term decision making where one or more factors will limits the strategy which may be implemented, it is likely that profit maximization will be seen as a major decision making goal. It should be noted however that in practice a number of goals will form part of the objective of an organization. In addition to short term profits management will wish to consider a number of longer term goals, for example
- Consolidation of market share
- Product leadership
- Good industrial relations
- Improving longer term productivity and profitability
- Quality leadership
- Employee and customer satisfaction
- Social responsibility
This balance between short and long term goals is likely to lead to decisions which are profit satisfying rather than profit maximizing resulting in the satisfactory profit level being earned in the short term
Single Limiting factor
Where a single limiting factor exists the decision making sequence may be implemented as follows:-
- Calculate the contribution per unit of limiting factor for each product
- Rank the products in order of size and contribution per unit of limiting factor
- Allow any minimum retention of less profitable products which is decided upon
- Use up the total units of the limiting factor in order to fulfill the forecast quantities in order of product ranking.
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