Linear Programming – Spare capacity and Shadow prices – ACCA Performance Management (PM)
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Hi Mr John,
Why are we adding extra kilo to material but we are not adding extra hour to labor
We add an extra kg to material if we want the shadow cost of material. We add an extra hour to labour if we want the shadow cost of labour.
The most per kg the company should be ready to pay seems a bit off or am i missing something?
Why a ‘bit off’? (The shadow price is the most extra they are prepared to pay).
Hi Mr Moffat,
I just did the question in the mcq after the chapter, however I don’t get why the most a company should be willing to pay is the shadow price plus the cost per material.
Would you be able to explain this to me please?
Kind regards
I found it, you’ve explained it in the video so just replayed it again. Apologies!
No problem 馃檪
how do we know that if we change the limit of materials the optimum profit will still be at point B?
Because the materials line will move but only by a very small amount, and the angle of the line will of course stay the same.
Dear Mr John,
I am confused on the shadow prices part. Can we use the labour equation 5S + 6E = 181 to calculate the shadow price instead of material equation 2S + 4E = 81? Using labour equation, the shadow price will be $0.75. Is it appropriate to use labour equation to calculate shadow price?
Please guide me on this. Thank you very much.
It depends on whether we want the shadow price of materials or the shadow price of labour.
Thanks for your reply Mr John. 馃檪
You are welcome 馃檪
Dear John,
Can you help me resolve one confusion. While calculating slack at the start of this video, it turned out to be zero in case of material and labour both. However, if i check the usage of material by using other method, it gives different result. What i did was that, we figured out that we are producing 30 standard chairs and 5 executive chairs. The quantity of material used in each chair is picked from the information given in question (i.e. 2 KG for standard and 4 kg for executive). When i multiply this by number of chairs produced it gives (i.e. 2*30 + 4*5) = 80 KG.
Same procedure i applied to calculate labour. Please let me where i am doing wrong.
There are only 80kg of material available and they are using all of it. Therefore there is no slack!
Oops. I am sorry. i had 100KG of available material in my mind, i don’t know where it came from. Thank you for your patience to answer some silly questions.