Assignment II: Merton Truck Company

Case Study Work by: Nagaraj NB,

I. SITUATIONAL ANALYSIS
Case Introduction
In the case, the company's president expressed dissatisfaction with
Merton's financial performance during the six-month period January-June
1988. He said "I know we are operating at capacity in some of our
production lines, But surely we can do something to improve our financial
position.”

Further he suggested “Maybe we should change our product mix. We don't

seem to be making a profit on our Model 101 truck. Why don't we just
stop making it altogether? Maybe we should purchase engines from an
outside supplier, relieving the capacity problem in our engine assembly
department.”

He instructed the Merton's controller and sales and production managers,

that “Why don't the three of you get together, consider the different
options, and co, me up with a recommendation?"

Current Situation
1. Specialized models of trucks: Model 101 & Model 102
2. Departments and Capacities
i. Engine Assembly - 100%
ii. Metal Stamping - 83.3%
iii. Model 101 Assembly - 40%
iv. Model 102 Assembly - 100%
3. Total machine hours available - 4000
4. They can sell the complete produce
5. Current monthly output:
i. Model 101 - 1000 units
ii. Model 102 - 1500 units

Problem Statement
“Merton Truck Company was unable to find the best product mix for
maximizing of profit while keeping optimal capacity utilization for the four
manufacturing departments i.e. engine assembly, metal stamping, Model
101 assembly, and Model 102 assembly”
II. METHODOLOGY

In order to decide whether we have to continue or stop the production of

any model first of all we need to calculate the contribution from each
models.
Hence, with the data provided in the Table A, B and C of the case the
following calculations are done.
Specification Model 101 Model 102
A. Direct Material 24000 20000
Direct Labour
Engine Assembly 1200 2400
Metal Stamping 800 600
Final Assembly 2000 1500
B. Total Direct Labour 4000 4500
Variable Overhead
Engine Assembly 2100 4000
Metal Stamping 2400 2000
Final Assembly 3500 2500
C. Total Variable Overhead 8000 8500
Selling Prices 39000 38000
Total Cost (A+B+C) 36000 33000
Contribution Margin per unit 3000 5000

After calculating the contribution these figures were taken as the

coefficient of objective function along with defining the case constraints
and Solver was executed to determine the optimal production quantity as
below:

MERTON TRUCK COMPANY

Decisi Objectiv Model Model
on e Engine Metal X Y
Variab Functio Assemb Stamp Assem Assem
le n ly ing bly bly
Model 101
(X) 2000 3000 1 2 2 0
Model 101
(Y) 1000 5000 2 2 0 3
24000
00 4000 6000 4000 3000
<= <= <= <=
4000 6000 5000 4500

Sensitivity Analysis has been performed which give us the idea of shadow price, AI, AD, Bin
Non-binding constraints as below:

Variable Cells
Final Reduced Objecti Allowa
 ve ble
Coeffici Increas
Cell Name Value Cost ent e
Model 101 (X) Decision
$B$3 Variable 2000 0 3000 2000
Model 101 (Y) Decision
$B$4 Variable 1000 0 5000 1000
Constraints

Constra Allowa
Final Shadow int ble
R.H. Increas
Cell Name Value Price Side e
$D$5 Engine Assembly 4000 2000 4000 500
$E$5 Metal Stamping 6000 500 6000 500
$F$5 Model X Assembly 4000 0 5000 1E+30
$G$5 Model Y Assembly 3000 0 4500 1E+30

Similar Methodology was adopted in solving various case Question

III. INFERENCES
As per the analysis
1. Engine assembly facility is completely utilized (binding constraint)
and further unit increase in engine assemble machine hours will
result in $2000 increase in contribution.
2. Metal Stamping facility is completely utilized (binding constraint)
and further Unit increase in Metal Stamping machine hours will
result in $500 increase in contribution
3. Model 101 and Model102 assembly shop is underutilized (non-
binding constraint)
4. Both the models are required to be produced to maximize the
contribution (decision variables are basic variables)
5. Contribution is maximized with 2000 units of Model 101 and 1000
units of Model 102.
IV. ANSWERS TO CASE QUESTIONS:
A) Best product mix is 2000 trucks of Model 101 & 1000 trucks of Model 102
B) Best product mix is 1999 trucks of Model 101 & 1001 trucks of Model 102. The extra unit of Engine Assembly
Capacity is worth $2000/-

Decisio
n Engine
Variabl Assembl Metal Model X Model Y
e Objective Function y Stamping Assembly Assembly
Model 101
(X) 1999 3000 1 2 2 0
Model 101
(Y) 1001 5000 2 2 0 3
2402000 4000 6000 4000 3000
<= <= <= <=
4001 6000 5000 4500
Variable
Cells
Final Reduced Objective Allowable Allowable
Valu
Cell Name e Cost Coefficient Increase Decrease
Model 101 (X) Decision
$B$3 Variable 1999 0 3000 2000 500
Model 101 (Y) Decision
$B$4 Variable 1001 0 5000 1000 2000

Constrai
nts
Final Shadow Constraint Allowable Allowable
Valu
Cell Name e Price R.H. Side Increase Decrease
$D$5 Engine Assembly 4001 2000 4001 499 501
$E$5 Metal Stamping 6000 500 6000 501 998
$F$5 Model X Assembly 3998 0 5000 1E+30 1002
$G$5 Model Y Assembly 3003 0 4500 1E+30 1497

C) Best product mix is 1900 trucks of Model 101 & 1100 trucks of Model 102. The profit would be $2600000/-
D) 500 units (Allowable increase for engine
assembly)

2) The company may adopt the renting alternative for maximum of 500 Engine Assembly hours which has contribution
of $1000 per hour. Hence max rent it can pay <= 2000*500 <=1000000/-
3)
Decisio
n Engine
Variabl Assembl Metal Model X Model Y
e Objective Function y Stamping Assembly Assembly
Model 101 (X) 2000 3000 1 2 2 0
Model 103 (Y) 1000 5000 2 2 0 3
Model 101 (Z) 0 2000 0.8 1.5 1 0
2400000 4000 6000 4000 3000
<= <= <= <=
4000 6000 5000 4500
Variable
Cells
Final Reduced Objective Allowable Allowable
Valu
Cell Name e Cost Coefficient Increase Decrease
Model 101 (X) Decision
$B$3 Variable 2000 0 3000 2000 500
Model 103 (Y) Decision
$B$4 Variable 1000 0 5000 1000 2000
Model 101 (Z) Decision
$B$5 Variable 0 -350 2000 350 1E+30
Constraint
s
Final Shadow Constraint Allowable Allowable
Valu
Cell Name e Price R.H. Side Increase Decrease
$D$6 Engine Assembly 4000 2000 4000 500 500
$E$6 Metal Stamping 6000 500 6000 500 1000
$F$6 Model X Assembly 4000 0 5000 1E+30 1000
$G$6 Model Y Assembly 3000 0 4500 1E+30 1500

No Merton should not produce

3 A) Model 103 trucks
The contribution from Model 103 truck should be >= (2000-(-350)) >=2350 for
3 B) considering it worth to produce

From the senstivity analysis it is known that allowable increase in the engine assembly capacity is 500. Addition more
4) than this will not make any improvement, hence it is not recommended with this soultion.
Now reworking the entire problem for
better analysis:

Direct Labor for Model 101 cost $ 1200 for normal working and $
1800 for Over time
Direct Labor for Model 102 cost $ 2400 for normal working and $
3600 for Over time
This results in reduced contribution i.e. $2400/- for Model 101 and $3800 for Model 102. Also Fixed cost is increased
by $ 0.75 Million
Reworkin
g this
Decisio
n Objective Engine Metal Model X Model Y
Variable Function Assembly Stamping Assembly Assembly Engine Assembly OT
Model 101
(X) 1500 3000 1 2 2 0 0
Model 103 1250 5000 2 2 0 3 0
(Y)
Model 101
(X') OT 0 2400 0 2 2 0 1
Model 102
(X') OT 250 3800 0 2 0 3 2
2350000 4000 6000 4000 3000 0
<= <= <= <= <=
4000 6000 5000 4500 2000
Microsoft Excel 14.0 Sensitivity Report
Worksheet: [Merton Truck
Company.xlsx]MC (5)
Report Created: 9/28/2015 1:16:35 PM
Variable
Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
Model 101 (X)
$B$3 Decision Variable 1500 0 3000 1400 0
Model 103 (Y)
$B$4 Decision Variable 1250 0 5000 0 1200
Model 101 (X') OT
$B$5 Decision Variable 0 0 2400 0 1E+30
Model 102 (X') OT
$B$6 Decision Variable 250 0 3800 1200 0

Constraint
s
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$D$7 Engine Assembly 4000 600 4000 500 1500
$E$7 Metal Stamping 6000 1200 6000 2000 1000
$F$7 Model X Assembly 3000 0 5000 1E+30 2000
466.66666
$G$7 Model Y Assembly 4500 67 4500 4500 1500
Engine Assembly
$H$7 OT 500 0 2000 1E+30 1500

If Over time is considered, the contribution is getting reduced by 50000 i.e. from $
2400000/- to $ 2350000/- so better to avoid it.
Question 5
This requires us to add new constraint to the product mix
Model 101 (X) -1
Model 102 (Y) 3
<= 0
Solving after the adding the new constraint shows the below result which indicates that new product mix is
2250 for model 101 and 750 for model 102. The new contribution is 1900000
MERTON TRUCK COMPANY
Decisi Objecti
on ve Engine
Varia Functio Assem Metal Model X Model Y Production Ratio
ble n bly Stamping Assembly Assembly Constraint
Model 101
(X) 2250 3000 1 2 2 0 -1
Model 102
(Y) 750 5000 2 2 0 3 3
19000
00 3750 6000 4500 2250 0
<= <= <= <= <=
4000 6000 5000 4500 0
Variable Cells
Cel Final Reduced Objective Allowable Allowable
l Name Value Cost Coefficient Increase Decrease
$B$ Model 101 (X) Decision
3 Variable 2250 0 3000 2000 4666.666667
$B$ Model 102 (Y) Decision
4 Variable 750 0 5000 1E+30 2000

Constraints
Cell Name Final Shadow Constraint R.H. Allowable Allowable
 Value Price Side Increase Decrease
$D$
5 Engine Assembly 3750 0 4000 1E+30 250
$E$
5 Metal Stamping 6000 1750 6000 400 6000
$F$
5 Model X Assembly 4500 0 5000 1E+30 500
$G$
5 Model Y Assembly 2250 0 4500 1E+30 2250
$H$
5 Production Ratio Constraint 0 500 0 1000 1000