Key factor analysis

SINCE IN SHORT RUN EVEN IF THE FIXED COST ARE SPECIFIC FOR A PRODUCT, THEY WILL REMAIN UNCHANGED BY PRODUCTION OF ANY NUMBER OF UNITS, AND HENCE OUR AIM SHOULD BE TO MAXIMIZE CONTRIBUTION.

Yes, in the short run, the fixed costs remain unchanged regardless of the number of units produced. So the aim should be to maximize the contribution per unit of the scarce resource, as it represents the additional profit generated from each additional unit of the limiting factor.

sir i understood the situation when the total fixed cost remain unchanged in short term, but when incremental fixed cost is given for the products i.e. fixed cost will only be incurred when the specific product is manufactured ,....in this situation, the limiting factor analysis of maximizing contribution won't work.... as the total fixed cost is not constant whatever the product mix, since the incremental fixed cost will only occur if the specific product is made. in this situtation what will we do to identify the order in which the goods are made.

In a situation where incremental fixed costs are given for specific products, the traditional limiting factor analysis of maximizing contribution may not be applicable. This is because the total fixed cost is not constant regardless of the product mix, as the incremental fixed cost will only be incurred if the specific product is manufactured. To identify the order in which the goods should be made in this situation, we would need to apply key factor analysis. Key factor analysis involves ranking the products based on their contribution per sales ratio. The product with the highest contribution per sales ratio would be produced first, followed by the product with the next highest ratio, and so on. This approach allows us to prioritise the production of products that generate the highest contribution and maximize profitability, taking into account the incremental fixed costs associated with each specific product.

but sir how the incremental fixed cost will be taken into account, since c/s ratio also does not include incremental fixed cost? please explain

As I have already said…. In a situation where incremental fixed costs are given for specific products, the traditional limiting factor analysis of maximizing contribution may not be applicable. This is because the total fixed cost is not constant regardless of the product mix, as the incremental fixed cost will only be incurred if the specific product is manufactured. How? Key factor analysis can be used to determine the order in which goods should be made. In this analysis, products are ranked based on their contribution per sales ratio. The product with the highest contribution per sales ratio is produced first, followed by the product with the next highest ratio, and so on. This approach allows for the prioritisation of products that generate the highest contribution and maximize profitability, considering the incremental fixed costs associated with each specific product.