a) Explain the term shadow price. (2 marks)
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The term “Shadow Price” is used to refer to monetary values assigned to currently unknowable or difficult to calculate costs. The estimated price of a good or service for which no market price exists.
b) Unity Company Ltd is preparing for next seasons operations. The company has provided the following information relating to its three products.
The company can only make available a total of 18,560 hours in the short run.
Required:
i) Provide the optimal production plan for Unity Ltd for the ensuing period. (5 marks)
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Labour hours required to meet demand
Shortage in Labours = Available labour hour – required labour hours
. = 18,560hours – 19,441hours
. = 881hours
Calculation of contribution per labour hour
ii) What is the total incremental benefit of producing DA instead of GE, assuming available resources can only meet demand of DA? (3 marks)
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Total (0.10 x 1,556 units) = GHS155.6
iii) Indicate the shadow price of the production plan and state the basic assumption under which this price will apply. (2 marks)
View Solution
The shadow price of the production plan is GHS0.40
It is assumed that the extra unit of resource can be obtained at the normal variable cost