CIMAPRO19-P01-1 Exam - Topic 10 Question 31 Discussion

Question

JRL manufactures two products from different combinations of the same resources. Unit selling prices and unit cost details for each product are as follows:

* Refer to your answer in the previous question.

The optimal solution to the previous question shows that the shadow prices of skilled labour and direct material A are as follows:

Skilled labour $ Nil Direct Material A $11.70

Explain the relevance of these values to the management of JRL.

Select ALL the true statements.

Xuan · Accepted Answer

A) The shadow price equals the additional contribution that would be earned from one extra unit of a scarce resource. and D) Since material A is one of the binding constraints, if the availability of material A could be increased by one unit, this would change the optimal plan.

Xuan · Answer

B) In a situation such as this, where a number of resources are scarce, the shadow price of any particular scarce resource will depend on whether or not the resource is not binding.

Xuan · Answer

C) The shadow price for skilled labour is NIL because although there is a shortage of skilled labour it does have a constraining effect on output of JR as other resources are more scarce.

Xuan · Answer

E) The decrease in contribution as a result of this change is the value of the shadow price of material A. The shadow price thus represents the maximum premium that should be paid for an additional unit of material A.