merton truck company case

7/22/2019 Merton Truck Company Case

1/22


2/22

1. Merton's financial performance was unsatisfactory2. Operating at capacity in some production lines3. 2 specialized models of trucks: Model 101 & Model 102

4. 4 departments and capacities1. Engine Assembly - 100%

2. Metal Stamping - 83.3%

3. Model 101 Assembly - 40%

4. Model 102 Assembly - 100%5. Total machine hours available: 40006. They can sell the complete produce7. Current monthly output: 1000 Model 101, 1500 Model 102


3/22

1. Sales Manager :

1. Stop making Model 101 trucks

2. Model 101: $39,000, Model 102: $38,000

2. Controller :1. Trying to absorb fixed overhead of Model 101 assembly

2. Increase production of Model 101

3. Production Manager:

1. Increase Model 101 without cutting back Model 1022. Purchase Model 101 or 102 engines from outside supplier

3. Reduce capacity problem in engine assembly

4. Reimburse supplier for labour and overhead


4/22

1. Best product mix for Merton ?2. Best Product mix if capacity is raised from 4000 to 4001

machine hours ?3. Worth of extra unit of capacity?4. If capacity is increased to 4100 machine hours,

contribution will increase by 100 times. Verify.

5. How many units of engine capacity can be added tochange the value of additional capacity?


5/22

A 101 102

Profit $3,000.00 $5,000.00

Units 2000 1000

1. Best Product Mix for Merton:

2. Contribution and Profit:

Contribution Fixed cost

$11,000,000.00 8600000

Profit= $2,400,000.00


6/22

Shadow Price of Engine Assembly = $ 2000So, Increase in Assembly unit capacity = 1 (4000 to 4001)Worth of extra unit of Capacity = 1 * 2000

= $ 2000

Final Shadow Constraint Allowable Allowable

Cell Name Value Price R.H. Side Increase Decrease

$D$11Engine Assembly TotalMachine Hr per month 4000 2000 4000 500 500


7/22

1. New Best Product Mix for Merton:

2. New contribution and Profit:

A 101 102

Profit $3,000.00 $5,000.00

Units 1999 1001


$11,002,000.00 8600000

Profit= $2,402,000.00


8/22

Shadow Price of Engine Assembly = $ 2000So, Increase in Assembly unit capacity = 100 (4000 to 4100)Worth of extra unit of Capacity = 100 * 2000

= $ 200,000



$D$11

Engine Assembly Total

Machine Hr per month 4000 2000 4000 500 500


9/22


2. New Profit:

3. New Contribution:

A 101 102

Profit $3,000.00 $5,000.00

Units 1900 1100

Initial Contribution 11000000 Increase

Contribution in part(b) $11,002,000.00 $2,000.00

Contribution in part(c) $11,200,000.00 $200,000.00

Times increase 100

Net Profit $2,600,000.00


10/22



$D$11



Allowable increase depicts the maximum number of Assemblyengine capacity that can be added without changing thecapacity worth.

Thus, 500 units of engine assembly capacity can be added.


11/22

1. Alternative suggested by Production Manager

1. Should the company adopt this alternative?

2. Maximum rent ?3. Maximum number of machine hours to be rented ?


12/22



$D$11



Since allowable increase is 500, so maximum hours for whichrenting is possible is 500 hours.

Since each hour increases contribution by 2000, so maximumrent to be paid per hour is $2000


13/22

The company can go for this alternative ifrent paid is below $2000. Any rent below thisamount will be profitable for the company



A 101 102

Profit $3,000.00 $5,000.00

Units 1500 1500


$12,000,000.00 8600000

Profit= $3,400,000.00


14/22

Given:1. Model 103 to be introduced2. Contribution : $ 2000

3. Total Engine Assembly Capacity = 5000 per month4. Total Metal Stamping Capacity = 4000 per month5. Assembled in Model 101 assembly department6. Requires half the time of Model 101 truck

Questions:1. Should they produce Model 103?2. When is it worthwhile to produce it?


15/22



A 101 102 103

Profit $3,000.00 $5,000.00 $2,000.00

Units 2000 1000 0


$11,000,000.00 8600000

Profit= $2,400,000.00


16/22

We can see from the sensitivity report that ifwe want to introduce Model 103 into solutionthen its contribution should be increased by

at least by 351.

Final Reduced Objective Allowable Allowable

Cell Name Value Cost Coefficient Increase Decrease

$C$64 Units Model 101 2000 0 3000 2000 500

$D$64 Units Mdel 102 1000 0 5000 1000 2000

$E$64 Units Mdel 103 0 -350 2000 350 1E+30


17/22

Given:1. Engine can be assembled on overtime2. Production Efficiency unchanged

3. Overtime capacity = 2000 machine hours4. Direct labour costs = 50% higher for overtime5. Variable overheads unchanged6. Monthly fixed overhead for engine assembly department

increases by $0.75 million

Question:Should they assemble engines overtime?


18/22



A 101 102

Profit $3,000.00 $5,000.00

Units 1500 1500


$12,000,000.00 8600000

Profit= $3,400,000.00

Net Profit $2,350,000.00


19/22

With the application of overtime in theengine assembly department, the netcontribution reaches to $2,350,000

Increased Fixed Cost 750000 750000

Increase in Labor 250*3600 900000

Cost saving 500*1200 600000

Total increase 1050000


20/22

Mertons Presidents opinion:1. Maximizing short-run contribution not good in long run2. Maximize Model 101 production

Agreed:1. Number of Model 101 >= 3 x Number of Model 1022. Maximize Contribution

Question:

Resulting optimal product mix?


21/22

1. New Best Product Mix for Merton after addition of constraint:


A 101 102

Profit $3,000.00 $5,000.00Units 2250 750


$10,500,000.00 8600000

Profit= $1,900,000.00


22/22

merton truck company case

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