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Hello John,
I am appearing for F5 exam in the June 2017 session as i am following your notes along with the lectures and Kaplan kit. yesterday i was going through shadow price mcqs from kaplan kit there is a question which i didn’t get it, so i am writing this to you for your help.Q plc makes 2 products Q 1 and Q2 from the same raw material the cost card are show below.
Q1 Q2
Selling price 20 18
direct Mat 6 5
Direct Lab 4 3
Variable OH 2 1.50Contribution per unit 8 8.50
The maximum demand for these product is 500 per units per week for Q1 and an unlimited number of unit per week for Q2
Required:
What should be the Shadow price of these material be if material were limited to 2000 kgs per week.?the ans of this question is not specially clear in the kit as they divide $8.50/ 2.5 kg= $3.40 and this is the shadow price which i do not understand
You have not copied out how many kgs of material is needed per unit for each of the products. I assume it is 2.5kg per unit for Q2, in which case it must be 3kg per unit for Q1.
The contribution per kg of material for Q1 is 8/3 = $2.67 per kg., and for Q2 is 8.50/2.5 = $3.40.
Therefore the will use all of the 2,000 kg available to make Q2. If they get more material, then again they will use it to make more Q2.
The shadow price is the extra contribution that would be made if they had 1 more kg of the material. Since they would use it in making Q2, one extra kg of material would earn them extra contribution of $3.40.
(Incidentally, even if Q1 gave a higher contribution per kg than Q2, the answer would still be the same. The reason is that they can only make a maximum of 500 of Q1 so any extra material would still go to making Q2)
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yes i missed the information about material per kg. and u assumed it right
thanks sir for your help.
Sir do you prefer kaplan kit for exam preparation as i am doing kaplan kit along with your lectures and notes.
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