ExpertMinds LogoExpertMinds
Medium2 marksMultiple Choice
Decision-making techniquesLinear ProgrammingDecision MakingSection A

ACCA · Question 07 · Decision-making techniques

Section A

GreenFields Farm uses linear programming to determine the optimal mix of two crops (Wheat and Barley) to plant, given constraints on land and fertilizer. The optimal solution has been found, and the shadow price for fertilizer is calculated to be $15 per kg.

Which of the following best describes the meaning of this shadow price?

Answer options:

A.

GreenFields Farm should sell its fertilizer if it can get more than $15 per kg.

B.

The total cost of fertilizer in the optimal production plan is $15 per kg.

C.

GreenFields Farm would be willing to pay up to a maximum premium of $15 per kg above the normal price for one additional kg of fertilizer.

D.

If fertilizer supply decreases by 1 kg, the total revenue of the farm will decrease by $15.

How to approach this question

Recall the definition of a shadow price in linear programming: it is the extra contribution generated by having one more unit of a binding constraint.

Full Answer

C.GreenFields Farm would be willing to pay up to a maximum premium of $15 per kg above the normal price for one additional kg of fertilizer.✓ Correct
In linear programming, the shadow price of a binding constraint is the increase in total contribution that would be created by having one additional unit of that limiting resource. Because it represents the extra contribution, it is also the maximum *premium* (above the normal variable cost) the business should be willing to pay to acquire one more unit.

Common mistakes

Confusing shadow price with the total purchase price of the resource, or confusing contribution with revenue.
06All questions08

Practice the full ACCA PM — Performance Management Practice Exam 4

32 questions · hints · full answers · grading

Sign up freeTake the exam

More questions from this exam

Q01**Section A** AgriCorp, a large-scale agricultural business, has recently implemented a system o...EasyQ02**Section A** GlobalHealth NGO operates in 15 developing countries, providing emergency medical ...MediumQ03**Section A** NovaTech is a startup developing a revolutionary AI-driven translation earpiece. M...MediumQ04**Section A** MetroWater, a public utility company, is transitioning from traditional absorption...EasyQ05**Section A** Titan Heavy Industries manufactures industrial cranes. The factory operates a bott...Medium
View all 32 questions →