MANVI MOTORS

The Manvi Motors of Malaysia produces cars under an agreement with Suzuki of Japan and trucks
under an agreement with General Motors of the USA. The company was established in 1972 and
now employs approximately 1000 people and can generally produce an average of 25 cars and
trucks per day.

Capital investment constraints have limited the nature of Manvi’s manufacturing facilities.
Consequently, it is not able to manufacture many of the items required for the assembly of cars
and trucks. These items are imported from Suzuki or GM. However, both Suzuki and GM must
limit the quantities of parts shipped to Manvi because of constraints on their own capacities. Suzuki
and GM have guaranteed to provide parts sufficient for 500 cars and 200 trucks respectively per
month.

GM has just announced several price increases, which have raised the direct manufacturing cost
(which includes all labor and material costs) of a Manvi truck from $800 to $1000 converted to
US dollars.

Suzuki has not raised prices on purchased parts, so the direct manufacturing cost of a Manvi car
has remained stable at $800. The Ministry of Economics controls the selling price of Manvi’s
output: cars sell at $4300 and trucks sell at $6000.

Manvi’s vehicles have a reputation as well-made and dependable products, suitable for the
Malaysian market. Demand is so great that the company can sell all the cars and trucks it can
produce, and the company expects no change in this situation. Manvi presently has unfilled orders
(already paid for) for 150 cars and 100 trucks.

The manufacturing process for both cars and trucks consists essentially of two departments, which
limits the number of vehicles that can be produced during any month. These departments are
fabrication and engine assembly. An agreement with the Ministry of Labor has set the minimum
labor usage combined in both departments to be at 14,000 worker-hours.

The fabrication department is organized as a job-shop, which produces hundreds of different parts
on 45 machine tools. A recent analysis has shown that this shop can plan on no more than 12,000
worker-hours of capacity in the coming month. Each car manufactured requires 20 worker-hours
of fabrication; each truck requires 40 worker-hours.

The assembly department is set up as a conventional assembly line. 10,000 worker-hours of

capacity will be available in the assembly department in the coming month. Each car requires 25
worker-hours of assembly; each truck requires only 10 worker-hours.

The fixed overhead costs are estimated at $10,000 in the fabrication department and $12,000 in
the assembly department.
At this morning’s management meeting, Farah Hormozi, the production manager expressed
considerable concern over GM’s price increases. The next month’s production schedule was to be
announced tomorrow, and she asked Sunil Ray, the managing director, whether the cost should
affect the currently planned production of 200 cars and 200 trucks. Mr. Ray replied “I have never
been sure if our current plan is the best we can have. If it is, I think we will just have to absorb the
price increase until the Ministry of Economics allows us to increase our selling price. In that case
we will go ahead with the previous plan – 200 cars and 200 trucks”.

(1) Was the current policy of producing 200 cars and 200 trucks the best for Manvi Motors
under the old cost structure?
(2) What is the best product mix for Manvi Motors under the new cost structure?
(3) If an additional worker-hour in any of the departments will cost the same amount, in which
department would you recommend making this additional worker-hour available?
(4) If 200 additional worker hours were available in the fabrication department for $3000,
should Farah pay this amount and get the additional hours?
(5) What are 1000 additional hours in the assembly department worth? What about 1100
hours?
(6) If the net profit from a truck is decreased by $500 will the best product mix be any different?
Will the total profit change?
(7) An error in record keeping indicates that the number of back-ordered trucks is only 85.
Will this change the best product mix?
(8) Farah has received word that the Minister of Labor will relax the labor restriction by 2000
worker-hours. Will this change the decision regarding the best product mix?

Manvi Motors is considering introducing a new Manvi van. The new model requires 30 hours in
the fabrication department and 20 hours in the assembly department. Each Manvi van will give a
net profit of $4000.

(9) Should any vans be produced?

(10) How much would it cost in terms of profit if, for some reason, the management insisted
that at least one van be made?
(11) How high should the profit from each van have to be before it became attractive enough to
produce?