ACCA Applied Skills · Performance Management · Limiting factors
In a linear programme, the shadow price of machine hours is $5 per hour and the constraint currently limits output to 100 hours. Which statement is correct?
The shadow price is the extra contribution earned from one more unit of a binding scarce resource within a valid range, so each extra machine hour adds $5 of contribution, and slack resources have a zero shadow price.
- AEach extra machine hour, within a valid range, increases contribution by $5Correct
- BEach extra machine hour costs the company $5 more than its normal rate
- CMachine hours have slack, so the shadow price is $5 for unused hours
- DThe shadow price is the contribution per unit of the product using machine hours
Explanation
A shadow price is the increase in contribution from one more unit of a scarce resource, valid within a limited range. It applies only to a binding constraint, so it cannot be a price on slack hours (whose shadow price is zero). It is not a per-unit product contribution.
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