Companies are faced with various constraints of production and they are forced to plan accordingly. The limiting constraints may include limited demand, limited skilled labor and other factors of production, and limited finance that forces companies to work under situations of capital rationing. Planning with limiting factors forces companies to revise their production plans to manage to work with the limiting factors. Given the fact that the primary goal of all companies is to maximize profits and that all fixed costs are not variable in the short run, companies should adopt approaches that aim at maximizing the contribution earned. In the case of a single limiting factor, the optimization problem is maximized through the factor analysis where the production options are ranked using the contribution earned per unit of the scarce resource. In the case of Smithton Inc. Specialized machine time is the limiting factor and thus the production of the computer chips should be ranked using the contribution per unit of specialized machine time.
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Smithton Inc. is faced with a shortage of special machine time; therefore, special machine time acts as the limiting factor since it is insufficient to produce the demanded production capacity (Association of Chartered Certified Accountants, 209). Smithton inc. demands a total of 9,550 machine time to produce the four types of computer chips; however, the company is faced with a constraint of the specialized machine time which is limited to only 6,000. This implies that the company will have to prioritize the production of the computer chips; computer chips that have the highest contribution per specialized machine time should be assigned the highest priority. Therefore, the company will be restricted to producing 6,500 units of chip x, 3,400 units if chip Z and 667 units of chip Y, and zero units of chip W.
Suggestions on eliminating the shortage of special machine time
Smithton Inc. may purchase additional specialized machines; this will increase the maximum number of available machine time and therefore eliminate the specialized machine time as the constraint factor. However, the elimination of the specialized machine time bottleneck may create another constraint factor, other factors of production such as variable labor, and materials may end up becoming a constraint factor in production (Atrill and McLaney 142). However, in Smithton’s Inc. case, the chances of having another limiting factor are minimal since the company has indicated that it has excess capacity of the other factors of production at the current level of production.
Outsourcing of production units: Smithton Inc. is incapable of producing all the demanded number of computer chips due to the deficiency in the specialized machine time. Thus, the company should concentrate on the production of the computer chips that produce the greatest contribution per specialized machine time which is the limiting factor. The company can then outsource the production of the other computer chips; this eliminates the need for the company to acquire additional specialized machines to eliminate the specialized machine time bottleneck (Brealey and Stewart 214).
Smithton Inc. should modernize its existing specialized machines to increase their speeds and efficiency of operation. The company may be utilizing aged machines that are time-consuming and have greater inefficiencies. This may be used to explain the specialized machine time inefficiency. Therefore, Smithton Inc. should modernize the specialized machines or replace them with more modern machines that are more advanced technologically, faster, and more efficient in production.
Leasing alternative machines: Smithton Inc. can lease extra machines to increase the number of available machine time. This eliminates the specialized machine time constraint and saves the company the costs that would have been incurred in purchasing additional new machines. Furthermore, it eliminates additional costs that would have been incurred by the company such as depreciation costs and taxation that eat into the company’s net profits (Wood and Sangster 264).
Association of Chartered Certified Accountants. Performance Management. Kaplan Publishing, UK: Berkshire, 2009.
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Atrill, Peter and McLaney, Eddie. Management Accounting for Decision Makers. 6 ed. Bradford, UK: Prentice-Hall, 2009.
Brealey, Richard A., and Stewart, Myers, C. Principles of Corporate Finance. 6th ed. London, UK: McGraw-Hill Companies, 2000.
Wood, Frank and Sangster, Alan. Business Accounting. 10 ed. Bradford, UK: Prentice-Hall, 2005.