MERTON TRUCK COMPANY

1) No. of Model 101= x, no. of model 102=y.

Unit contribution/model= S.P – (Variable costs + Fixed cost).
For Model 101, variable cost=36000 /unit,
For Model 102, variable cost=33000/unit.
Fixed cost for both the model= 8600000
Therefore, total contribution z=39000x+38000y-36000x-33000y-8600000

Z=3000x+5000y-8600000

The Constraints are:

Engine assembly: x + 2y <= 4000

Metal stamping: 2x + 2y <=6000
Model 101 assembly: 2x <=5000
Model 102 assembly: 3y <= 4500
x,y>=0.
Solving, x=2000, y=1000, z=2400000

(b)If engine assembly capacity is increased by 1 unit to 4001, optimal product

mix is x=1999, y=1001. By sensitivity analysis, shadow price for engine
assembly is 2000 for allowable increase/decrease of available constraint by
500. Hence, extra unit of capacity is worth 2000. Therefore, increase in
contribution z is 2000

(c) Since, allowable increase of available constraint of engine assembly is

500,
hence capacity increase by 100 will lead to increase in contribution= shadow
price (engine assembly capacity) * increase in avl. Constraint (<500) = 2000
* 100 = 100 times as contribution increase in (b) Also if we use solver, for
engine assembly constraint= 4100, x = 1900, y=1100, z= 2600000.
Therefore, increase in contribution = 200000.

(d) Maximum allowable increase is 500.

2) Since shadow price is 2000, maximum rent Merton can give to supplier is
2000 for an hour of engine assembly capacity utilization. Also since allowable
increase is 500, maximum number of engine hours it should rent is 500.

3) For Model 103, we introduce a 3rd constraint w.

Contribution by w is given as 2000.
Hence now, z=3000x + 5000y + 2000w-8600000.
As per given data, machine-hour/truck for model 103 are 0.8, 1.5 and 1 on
engine assembly line, metal stamping line and Model 101 line respectively.
Hence, new constraints:

Engine assembly: x + 2y + .8w <= 4000

Metal stamping: 2x + 2y + 1.5w <= 6000
Model 101 assembly : 2x + w < = 5000
Model 102 assembly : 3y <= 4500
Solving we have, x=2000, y=1000, w=0.

(a) Hence, Merton should not produce Model 103 trucks

(b) Reduced cost of Model 103 truck is -350 for unit contribution of 2000.
Hence contribution has to be 2350 for it to be worthwhile for Merton to
produce the new model.

4) Let us introduce 2 new variables x1 and y1 for no. of Model 101 and 102
trucks produced due to 2000 machine-hours of engine assembly overtime.
Reduced contribution of x1 and x2 are 2400 and 3800 due to 50% increase in
direct labor costs for overtime production.
Therefore, z= 3000x + 5000 y + 2400 x1 + 3800 y1 - 9350000.

Now constraints are:

Engine assembly(normal): x + 2y <= 4000

Engine assembly(overtime) : x1 + 2y1 <= 2000
Metal stamping: 2x + 2y + 2x1 + 2y1 <= 6000
Model 101 assembly: 2x + 2x1 <= 5000
Model 102 assembly: 3y + 3y1 <= 4500

Solving we have, x=1000, y=1250, x1=0, y1=250.

This gives z=2350000.
Therefore, we find z= 2350000 < 2400000 (when Merton was not assembling
engine on overtime).

Hence, Merton should not produce engines in overtime.

5) We only introduce another constraint in addition to all constraints given in

(1):
x > 3y => x – 3y >= 0.
Now when we solve for maximizing
z = 3000x + 5000y-8600000,
we get x =2250, y= 750 which is now the optimal product mix.
And maximum optimal solution would be 1900000.