Merton Truck Company

Table A Machine hours: Requirement and Availability

Machine hours required per truck

Department Model 101 Model 102 Total machine hours available per month
Engine assembly 1 2 4000
Metal stamping 2 2 6000
Model 101 assembly 2 5000
Model 102 assembly 3 4500

Table B Standard Product Cost

Model 101
Direct materials 24000
Direct labor
Engine assembly 1200
Metal stamping 800
Final assembly 2000
4000
Overhead*
Engine assembly 2525
Metal stamping 3480
Final assembly 6200
12205
Total 40205
* see table C

Table C Overhead Budget for 1988

Total overhead per Fix overhead per month*

Department month* ($ millions) ($ millions)
Engine assembly 9.8 1.7
Metal stamping 8.1 2.7
Model 101 assembly 6.2 2.7
Model 102 assembly 5.25 1.5
29.35 8.6
* Based on a monthly production rate of 1000 model 101 and 1500 model 102 trucks
* Fixed overhead was distributed to the two truck models in proportion to degree of capacity utilization
 Other data:
hours available per month Sell price model 101 39000
4000 Sell price model 102 38000
6000
5000 Contribution model 101 selling price - (direct materials+direct
4500 39000 - (24000+4000+8000)
3000

Contribution model 102

38000 - ( 20000+4500+8500)
Model 102 5000
20000
Maximum contribution (Z) 3000M101+5000M102
2400
600
1500
4500

4850
3080
3500
11430
35930

Variable Overhead/Unit
Model 101 Model 102
2100 4000
2400 2000
3500
2500
8000 8500

e of capacity utilization
ling price - (direct materials+direct labor+variable overhead per unit)
000 - (24000+4000+8000)

000 - ( 20000+4500+8500)

00M101+5000M102
Merton Truck Company

Problems 1(a): Find the best product mix for Merton

Product Model 101 Model 102

Contribution 3000 5000
Resources Usage Constraint Available
Engine assembly 1 2 4000 <= 4000
Metal stamping 2 2 6000 <= 6000
Model 101 assembly 2 4000 <= 5000
Model 102 sssembly 3 3000 <= 4500

Production
Model 101 2000
Model 102 1000
Max Contribution 11000000

The best product mix for Merton are 2000 Model 101 and 1000 Model 102 with the total contribution 11000000
 Left over Max. Z= 3000M101+5000M102
0 Constraint:
0 Engine assembly: M101+2M102<=4000
1000 Metal stamping: 2M101+2M102<=6000
1500 M101 assembly: 2M101<=5000
M102 assembly: 3M102<=4500

total contribution 11000000

2

2<=4000
02<=6000
0
0
Merton Truck Company

Problems 1(b): What would be the best product mix if engine assembly capacity were raised by one unit,
What is the extra unit of capacity worth?

Product Model 101 Model 102

Contribution 3000 5000
Resources Usage Constraint Available
Engine assembly 1 2 4001 <= 4001
Metal stamping 2 2 6000 <= 6000
Model 101 assembly 2 3998 <= 5000
Model 102 sssembly 3 3003 <= 4500

Production
Extra unit capacity
Model 101 1999 worth 11002000 11000000
Model 102 1001 (max cont. 1-max cont. 2) 2000
Max Contribution 11002000

The best product mix if engine assembly capacity raised to 4001 is 1999 model 101 and 1001 model 102 with the t
The extra unit of capacity worth is 2000
y were raised by one unit, from 4000 to 4001 machine hours?

Left over Max. Z= 3000M101+5000M102

0 Constraint:
0 Engine assembly: M101+2M102<=4001
1002 Metal stamping: 2M101+2M102<=6000
1497 M101 assembly: 2M101<=5000
M102 assembly: 3M102<=4500

001 model 102 with the total contribution 11002000

2

2<=4001
02<=6000
0
0
Merton Truck Company

Problems 1(c): Assume that a second aditional unit of engine assembly capacity is worth the same as the
then the increase in contribution would be 100 times in part (b)

Product Model 101 Model 102

Contribution 3000 5000
Resources Usage Constraint Available
Engine assembly 1 2 4100 <= 4100
Metal stamping 2 2 6000 <= 6000
Model 101 assembly 2 3800 <= 5000
Model 102 sssembly 3 3300 <= 4500

Production
Extra unit capacity
Model 101 1900 worth (b) 11002000 11000000
Model 102 1100 (max cont. 1-max cont. 2) 2000
Max Contribution 11200000

Extra unit capacity

worth (c) 11200000 11000000
(max cont. 1-max cont. 2) 200000 (increase 100 times from

If the capacity were increased to 4100 machine hours then the total contribution will be 11200000 which increased
 worth the same as the first. Verify that if the capacity were increased to 4100 machine hours

Left over Max. Z= 3000M101+5000M102

0 Constraint:
0 Engine assembly: M101+2M102<=4100
1200 Metal stamping: 2M101+2M102<=6000
1200 M101 assembly: 2M101<=5000
M102 assembly: 3M102<=4500

crease 100 times from [b])

200000 which increased 200000 (100 times) from the total contribution (1a)
2

2<=4100
02<=6000
0
0
Merton Truck Company

Problems 1(D): How many units if engine assembly capacity can be added before there is a change in the

Engine assembly increase 500 as shown as sensitivity report table 1A

Product Model 101 Model 102
Contribution 3000 5000
Resources Usage Constraint Available
Engine assembly 1 2 4500 <= 4500
Metal stamping 2 2 6000 <= 6000
Model 101 assembly 2 3000 <= 5000
Model 102 sssembly 3 4500 <= 4500

Production
Model 101 1500
Model 102 1500
Max Contribution 12000000

Contraint
1M101 + 2M102 4500

The unit can be added is 4500 - 4000

500
here is a change in the value of an additional unit of capacity?

Left over Contraint

0 Metal stamping x1 + metal stamping x2 2X1 + 2X2
0 Model 102 assembly 3X2
2000
0
Merton Truck Company

If the engine assembly added less than 500 then the contribution will change

Product Model 101 Model 102

Contribution 3000 5000
Resources Usage Constraint Available
Engine assembly 1 2 4499 <= 4499
Metal stamping 2 2 6000 <= 6000
Model 101 assembly 2 3002 <= 5000
Model 102 sssembly 3 4497 <= 4500

Production
Model 101 1501
Model 102 1499
Max Contribution 11998000
Left over
0
0
1998
3
Microsoft Excel 16.74 Sensitivity Report
Worksheet: [Case Study 1_group 7.xlsx]2
Report Created: 26/06/23 11.57.00

Variable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$B$14 Model 101 Model 101 2000 0 3000 2000 500
$B$15 Model 102 Model 101 1000 0 5000 1000 2000

Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$D$8 Engine assembly Usage 4000 2000 4000 500 500
$D$9 Metal stamping Usage 6000 500 6000 500 1000
$D$10 Model 101 assembly Usage 4000 0 5000 1E+030 1000
$D$11 Model 102 sssembly Usage 3000 0 4500 1E+030 1500
Merton Truck Company

Problems 2: Merton's production manager suggest purchasing model 101 aor model 102 engine from
If Merton decides to pursue this alternative, it will be effectively "renting" capacity. Furnis
Should the company adopt this alternative? If so, what is the maximum rent it should be w

Product Model 101 Model 102

Contribution 3000 5000
Resources Usage Constraint Available
Engine assembly 1 2 4500 <= 4500
Metal stamping 2 2 6000 <= 6000
Model 101 assembly 2 3000 <= 5000
Model 102 sssembly 3 4500 <= 4500

Production
Model 101 1500
Model 102 1500
Max Contribution 12000000

Based on the sensitivity report 1A, the company should adopt this alternative, with the maximum rent 2000 and m
If so then the max contribution will be 12000000 as seem as tablel (1D)
101 aor model 102 engine from an outside supplier in order to relieve the capacity problem on the engine assembly department
tively "renting" capacity. Furnishing the necessary materials and engine components, and reimbursing the outside supplier for l
he maximum rent it should be willing to pay for a machine-hour of engine assembly capacity? What is the maximum number of

Left over Max. Z= 3000M101+5000M102

0 Constraint:
0 Engine assembly: M101+2M102<=4500
2000 Metal stamping: 2M101+2M102<=6000
0 M101 assembly: 2M101<=5000
M102 assembly: 3M102<=4500

the maximum rent 2000 and maximum number of machine hours to rent is 500
e engine assembly department.
rsing the outside supplier for labor and overhead.
hat is the maximum number of machine-hours it should rent?

2<=4500
02<=6000
0
0
Merton Truck Company

Problems 3: Merton is considering the introduction of a new truck, to be called model 103. Each m
The total engine assembly capacity would be sufficient to produce 5000 model 103 p
The new truck would be assembled in the model 101 assembly department, each mo
3 (a) Should Merton produce model 103 trucks?
3 (b) How high would the contribution on each model 103 truck have to be before it becam

Product Model 101 Model 102 Model 103

Contribution 3000 5000 2000
Resources Usage Constraint
Engine assembly 1 2 0.8 4000 <=
Metal stamping 2 2 1.5 6000 <=
Model 101 assembly 2 1 4000 <=
Model 102 sssembly 3 3000 <=

Production
Model 101 2000
Model 102 1000
Model 103 0
Max Contribution 11000000

3 (a) Merton should not produce model 103 trucks, at it shown above the optimum solutio
3 (b) The contribution of model 103 trucks should increase 350 (as the sensitivity report sh
e called model 103. Each model 103 truck would give a contribution of 2000.
produce 5000 model 103 per month, and the total metal stamping capacity would be sufficient to produce 4000 model 103
mbly department, each model 103 truck requiring only half as much time as a model 101 truck

have to be before it became worthwhile to produce new model?

Available Left Over Added data

4000 0 Model 103
6000 0 Contribution 2000
5000 1000 Engine assembly 5000
4500 1500 Metal stamping 4000
Time 1

above the optimum solution for the contribution of 2000 did not give any production of model 103 trucks
(as the sensitivity report shown) to 2350, so at least the contribution +1
uce 4000 model 103

engine assembly X1&X2/engine assembly X3

4000/5000 0.8
mental stamping X1&X2/mental stamping X3
6000/4000 1.5
Microsoft Excel 16.74 Sensitivity Report
Worksheet: [Book1.xlsx]Sheet5
Report Created: 24/06/23 00.34.07

Variable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$B$13 Model 101 Model 101 2000 0 3000 2000 500
$B$14 Model 102 Model 101 1000 0 5000 1000 2000
$B$15 Model 103 Model 101 0 -350 2000 350 1E+030

Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$E$6 Engine assembly Usage 4000 2000 4000 500 500
$E$7 Metal stamping Usage 6000 500 6000 500 1000
$E$8 Model 101 assembly Usage 4000 0 5000 1E+030 1000
$E$9 Model 102 sssembly Usage 3000 0 4500 1E+030 1500
Merton Truck Company

Problems 3: Merton is considering the introduction of a new truck, to be called model 103. Each m
The total engine assembly capacity would be sufficient to produce 5000 model 103 p
The new truck would be assembled in the model 101 assembly department, each mo
3 (a) Should Merton produce model 103 trucks?
3 (b) How high would the contribution on each model 103 truck have to be before it becam
Table if the contribution of model 103 became 2351

Product Model 101 Model 102 Model 103

Contribution 3000 5000 2351
Resources Usage Constraint
Engine assembly 1 2 0.8 4000 <=
Metal stamping 2 2 1.5 6000 <=
Model 101 assembly 2 1 2857.142857 <=
Model 102 sssembly 3 2571.428571 <=

Production
Model 101 0
Model 102 857.1428571
Model 103 2857.142857
Max Contribution 11002857.14
e called model 103. Each model 103 truck would give a contribution of 2000.
produce 5000 model 103 per month, and the total metal stamping capacity would be sufficient to produce 4000 model 103
mbly department, each model 103 truck requiring only half as much time as a model 101 truck

have to be before it became worthwhile to produce new model?

Available Left Over Added data

4000 0 Model 103
6000 0 Contribution 2000
5000 2142.857143 Engine assembly 5000
4500 1928.571429 Metal stamping 4000
Time 1
uce 4000 model 103

5000/5000 0.8
4000/6000 1.5
Merton Truck Company

Problem 4 Engines can be asembled on overtime in the engine assembly department. Suppose pr
Direct labor costs are higher 50% for overtime production. While variable overhead w
Should Merton assemble engines on overtime?

Product Model 101 Model 102

Contribution 2400 3800
Resources Usage Constraint Available
Engine assembly 1 2 4500 <= 6000
Metal stamping 2 2 6000 <= 6000
Model 101 assembly 2 3000 <= 5000
Model 102 sssembly 3 4500 <= 4500

Production
Model 101 1500
Model 102 1500
Max Contribution 9300000

Merton should not assemble engines overtime because the contribution would not increase as the optimal solutio
The contribution decrease 600 for model 101 and 1200 for model 102
bly department. Suppose production efficiencies do not change and 2000 machine hours of engine assembly overtime capacity
. While variable overhead would remain the same, monthly fixed overhead in the engine assembly department would increase

Direct labor Model 101

Engine assembly
Left over Metal stamping
1500 Final assembly
0 Total
2000
0 Contribution model 101 overtime

ease as the optimal solution (1A)

engine assembly overtime capacity are available.
sembly department would increase by 0,75million

Overtime Direct labor Model 102

1200 1800 Engine assembly
800 800 Metal stamping
2000 2000 Final assembly
4000 4600 Total

selling price - (direct materials+direct labor+variable overhead per unit) Contribution model 102 overtime
39000 - (24000+4600+8000)
2400
 ect labor Model 102 Overtime
gine assembly 2400 3600
etal stamping 500 600
al assembly 1500 1500
Total 4400 5700

ntribution model 102 overtime selling price - (direct materials+direct labor+variable overhead per unit)
38000 - (20000+5700+8500)
3800
head per unit)
Merton Truck Company

Problem 5 Merton's president, in arguing that maximizing short-run contribution was not necess
After some discussion, it was agreed to maximize the monthly contribution as long as
What is the resulting "optimal" product mix?

Product Model 101 Model 102

Contribution 3000 5000
Resources Usage Constraint Available
Engine assembly 1 2 3750 <= 4000
Metal stamping 2 2 6000 <= 6000
Model 101 assembly 2 4500 <= 5000
Model 102 sssembly 3 2250 <= 4500
Produce Max 1 -3 0 >= 0

Production
Model 101 2250
Model 102 750
Max Contribution 10500000

The optimal product mix if the number of model 101 trucks produced was at least three times the number of mode
contribution was not necessarily good for the company in the long run, wanted to produce as many model 101 as possible
thly contribution as long as the number of model 101 trucks produced was at least three times the number of model 102.

Added constraint

Left over model 101 trucks x1

250 model 102 trucks x2
0
500 X1 >= 3X2
2250 X1 - 3X2 >= 0
0

e times the number of model 102 are 2250 model 101 and 750 model 102 with the total contribution 10500000
 any model 101 as possible
the number of model 102.

bution 10500000