A limiting factor represents any production resources that are scarce in supply there, inhibiting a company from expanding its operations. Nwer, Mahmoud, and Zurqani (2021) suggest that an organization can exhibit one or more limiting factors that can adversely hinder its level of production. Common examples of limiting factors include labor, where the limit can occur in terms of inadequacy of personnel or a shortage in skillset (Emalyanov, Kurylo, and Vysotskij, 2013). Materials are also a common limiting factor, and an organization may experience a lack of adequate resources to produce enough units to meet market demand. Other limiting factors include manufacturing and storage capacities, which inhibit a company’s capacity to manufacture and store units.
Limiting factor analysis is the approach utilized to determine a key factor that constrains sales or production processes. The central objective for conducting a limiting factor analysis entails the identification of constraints and bottlenecks that prevent an organization from attaining its full sales or production processes (Nwer, Mahmoud, and Zurqani 2021). Therefore, by identifying a limiting factor, an organization can focus on identifying strategies that can be adopted to remove or overcome the specific limiting factor, thereby ensuring a relative increase in sales of production.
Conducting a limiting factor analysis involves a six-step procedure. The first step in limiting factor analysis is the identification of the specific limiting factors (Gullison and Hardner, 2009). In the case of Motor Ideal Limited, an evident limiting factor is the availability of labor, and availability of materials. The second step in limiting factors analysis is determining the contribution margin per unit for every product. The contribution margin per unit is obtained by subtracting variable costs from the selling price. The third step entails calculating the contribution per unit of the limiting factor (Gullison and Hardner, 2009). Motor Ideal will obtain the contribution margin per limiting factor by dividing the contribution margin per unit by an equal amount of the specific limiting factor.
The fourth step in limiting factor analysis is ranking the factors in the order of their contribution per unit of the scarce resources. The limiting factor is represented by the factor that has the least contribution margin per unit. The fifth step involves the determination of an optimum production plan. An organization will identify the optimum production plan as the one that maximizes its contribution margin in reference to the constraints brought about by the limiting factors (Nwer, Mahmoud, and Zurqani 2021). The last step in limiting factor analysis entails the determination and provision of suggestions that would help overcome an organization’s limiting factors. For example, in the case of Motor Ideal, the company can overcome the limiting factor associated with the availability of materials by exploring a variety of options. The company can invest in viable processes and technology that would optimize the use of steel in the production process. In turn, this plays a role in lowering the amount of steel required in the manufacture of a single car. The company can also consider using alternative materials that can be used in place of steel. Additionally, the company can also consider sourcing its steel from several steel suppliers. This approach will help to ensure stability in the supply of raw materials.
In conclusion, by identifying a limiting factor coupled with the development of an optimum production plan, Motor Ideal can significantly enhance its overall production capacity, increasing its sales and profit margin. Exploring multiple options to overcome limiting factors is critical for Motor Ideal to optimize its production and gain a better competitive edge in the automobile industry.
References
Emelyanov, A., Kurylo, O. and Vysotskij, A., 2013. Structuring expenses of industrial enterprises in the evaluation process of its production and sales potential. ECONTECHMOD: An International Quarterly Journal on Economics of Technology and Modelling Processes, 2.
Gullison, R. and Hardner, J., 2009. Using limiting factors analysis to overcome the problem of long time horizons. New Directions for Evaluation, 2009(122), pp.19-29. https://doi.org/10.1002/ev.292
Nwer, B.A., Ben Mahmoud, K.R., Zurqani, H.A. and Elaalem, M.M., 2021. Major limiting factors affecting agricultural use and production. The Soils of Libya, pp.65-75. doi: https://doi.org/10.1007/978-3-030-66368-1_5
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