Merton's Truck company Case Study Solution

Question

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 Merton's Truck company Case Study Solution

Answer
Model 101 = 2000
Model 102 = 1000.
Profit = $ 2400000
Extra 1 unit of engine assembly is worth = $2000 as per senstivity report. Original amount = $2400000 and
by increasing 1 unit the new figure is $2402000

If Capacity of Engine assembly is increased to 4100

Increase in profit due to 100 unit increase in production capacity = 2600000 - 2400000 = $200000

500 units of Engine Assembly capacity can be added before it capacity worth changes
Profit at 4500 & 4501 is same i.e production decision does not change

Max increase in capacity we can have = 500 hrs and profit contribution increase $2000 per hour

No, Company Should not produce Model 103 trucks with $2000 profit

Model 103 CM shold be more than 2350 in order to make it worthy of production.

With the 2000 overtime capacity of engine assembly available and extra cost,
Below Product Mix is possible:
Model 101 = 1500 units
Model 102 = 1500 units
Instead of Profit, company will occur loss of = $50,000
Hence, it is not advisable to utilize the overtime capacity.
For the given consition i.e. Production of Model 101 should be minimum 3 times of Model 102, the
Resulting Product Mix will be:
Model 101 = 2250
Model 102 = 750.
 Costs involved

Specification Model 101 Model 102

Cost of Material 24000 20000
Direct Labour
Engine Assembly 1200 2400
Metal Stamping 800 600
Final Assembly 2000 1500
Total DL 4000 4500
Variable Overhead
Engine Assembly 2100 4000
Metal Stamping 2400 2000
Final Assembly 3500 2500
Total Variable Overhead 8000 8500
Selling Prices 39000 38000
Total Variable Cost 36000 33000
Contribution Margin Per unit 3000 5000
Q - 1(a)
Name Model 101 Model 102 Maximize Function
Quantity per month 2000 1000 Perunit Cost Model 101
Selling Price 39000 38000 Per Unit Cost Model 102
Profit per unit 3000 5000 Fixed Overhead

Name Model 101 Model 102

Engine Assembly 4000
Metal Stamping 6000
Model 101 Assembly 4000 0
Model 102 Assembly 0 3000
Constraints LHS
Engine Assembly 1 2 4000
Metal Stamping 2 2 6000
Model 101 Assembly 2 0 4000
Model 102 Assembly 0 3 3000

Specification Model 101 Model 102

Cost of Material 24000 20000
Direct Labour
Engine Assembly 1200 2400
Metal Stamping 800 600
Final Assembly 2000 1500
Total DL 4000 4500
Total DL incld Cost of Mat 28000 24500
Overhead
Engine Assembly 2525 4850
Metal Stamping 3480 3080
Final Assembly 6200 3500
Total Overhead 12205 11430
Variable Overhead
Engine Assembly 2100 4000
Metal Stamping 2400 2000
Final Assembly 3500 2500
Total Variable Overhead 8000 8500
Variable Overhead*Monthly 8000000 12750000

Total Variable Cost per Unit 36000 33000

Overhead Budget 1000000

Headers Total Overhead per month
Fixed Overhead per month
Engine Assembly 9800000 1700000
Metal Stamping 8100000 2700000
Model 101 Assembly 6200000 2700000
Model 102 Assembly 5250000 1500000
Total 29350000 8600000
2400000
36000
33000
8600000

RHS % Utilization
<= 4000 100%
<= 6000 100%
<= 5000 80%
<= 4500 67%
Q - 1(b)
Name Model 101 Model 102 Maximize Function
Quantity per month 1999 1001 Perunit Cost Model 101
Selling Price 39000 38000 Per Unit Cost Model 102
Profit per unit 3000 5000 Fixed Overhead

Name Model 101 Model 102

Engine Assembly 4000
Metal Stamping 6000
Model 101 Assembly 4000 0
Model 102 Assembly 0 3000
Constraints LHS
Engine Assembly 1 2 4001
Metal Stamping 2 2 6000
Model 101 Assembly 2 0 3998
Model 102 Assembly 0 3 3003

Specification Model 101 Model 102

Cost of Material 24000 20000
Direct Labour
Engine Assembly 1200 2400
Metal Stamping 800 600
Final Assembly 2000 1500
Total DL 4000 4500
Total DL incld Cost of Mat 28000 24500
Overhead
Engine Assembly 2525 4850
Metal Stamping 3480 3080
Final Assembly 6200 3500
Total Overhead 12205 11430
Variable Overhead
Engine Assembly 2100 4000
Metal Stamping 2400 2000
Final Assembly 3500 2500
Total Variable Overhead 8000 8500
Variable Overhead*Monthly 8000000 12750000

Total Variable Cost per Unit 36000 33000

Overhead Budget 1000000

Headers Total Overhead per month
Fixed Overhead per month
Engine Assembly 9800000 1700000
Metal Stamping 8100000 2700000
Model 101 Assembly 6200000 2700000
Model 102 Assembly 5250000 1500000
Total 29350000 8600000
2402000
36000
33000
8600000

RHS % Utilization
<= 4001 100%
<= 6000 100%
<= 5000 80%
<= 4500 67%
Microsoft Excel 16.0 Sensitivity Report
Worksheet: [Merton Case Study.xlsx]1(b)
Report Created: 4/18/2020 3:40:46 AM

Variable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$B$3 Quantity per month Model 101 1999 0 3000 2000 500
$C$3 Quantity per month Model 102 1001 0 5000 1000 2000

Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$D$13 Engine Assembly LHS 4001 2000 4001 499 501
$D$14 Metal Stamping LHS 6000 500 6000 501 998
$D$15 Model 101 Assembly LHS 3998 0 5000 1E+030 1002
$D$16 Model 102 Assembly LHS 3003 0 4500 1E+030 1497
Q - 1(c)

Name Model 101 Model 102

Quantity per month 1900 1100
Selling Price 39000 38000
Profit per unit 3000 5000

Name Model 101 Model 102

Engine Assembly 4000
Metal Stamping 6000
Model 101 Assembly 4000 0
Model 102 Assembly 0 3000
Constraints
Engine Assembly 1 2
Metal Stamping 2 2
Model 101 Assembly 2 0
Model 102 Assembly 0 3

Specification Model 101 Model 102

Cost of Material 24000 20000
Direct Labour
Engine Assembly 1200 2400
Metal Stamping 800 600
Final Assembly 2000 1500
Total DL 4000 4500
Total DL incld Cost of Mat 28000 24500
Overhead
Engine Assembly 2525 4850
Metal Stamping 3480 3080
Final Assembly 6200 3500
Total Overhead 12205 11430
Variable Overhead
Engine Assembly 2100 4000
Metal Stamping 2400 2000
Final Assembly 3500 2500
Total Variable Overhead 8000 8500
Variable Overhead*Monthly production rate 8000000 12750000

Total Variable Cost per Unit 36000 33000

Overhead Budget 1000000

Headers Total Overhead per month Fixed Overhead per month
Engine Assembly 9800000 1700000
Metal Stamping 8100000 2700000
Model 101 Assembly 6200000 2700000
Model 102 Assembly 5250000 1500000
Total 29350000 8600000
 Maximize Function 2600000
Perunit Cost Model 101 36000
Per Unit Cost Model 102 33000
Fixed Overhead 8600000

LHS RHS % Utilization

4100 <= 4100 100%
6000 <= 6000 100%
3800 <= 5000 76%
3300 <= 4500 73%
Microsoft Excel 16.0 Sensitivity Report
Worksheet: [Merton Case Study.xlsx]1(c)
Report Created: 4/18/2020 3:42:15 AM

Variable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$B$6 Quantity per month Model 101 1900 0 3000 2000 500
$C$6 Quantity per month Model 102 1100 0 5000 1000 2000

Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$D$16 Engine Assembly LHS 4100 2000 4100 400 600
$D$17 Metal Stamping LHS 6000 500 6000 600 800
$D$18 Model 101 Assembly LHS 3800 0 5000 1E+030 1200
$D$19 Model 102 Assembly LHS 3300 0 4500 1E+030 1200
Q - 1(d)

Objective
3400000

Name Model 101 Model 102

Quantity per month 1500 1500
Selling Price 39000 38000
Profit per unit 3000 5000

Name Model 101 Model 102

Engine Assembly 4000
Metal Stamping 6000
Model 101 Assembly 4000 0
Model 102 Assembly 0 3000
Constraints
Engine Assembly 1 2
Metal Stamping 2 2
Model 101 Assembly 2 0
Model 102 Assembly 0 3

Specification Model 101 Model 102

Cost of Material 24000 20000
Direct Labour
Engine Assembly 1200 2400
Metal Stamping 800 600
Final Assembly 2000 1500
Total DL 4000 4500
Total DL incld Cost of Ma 28000 24500
Overhead
Engine Assembly 2525 4850
Metal Stamping 3480 3080
Final Assembly 6200 3500
Total Overhead 12205 11430
Variable Overhead
Engine Assembly 2100 4000
Metal Stamping 2400 2000
Final Assembly 3500 2500
Total Variable Overhead 8000 8500
Variable Overhead*Monthl 8000000 12750000

Total Variable Cost per Unit 36000 33000

Overhead Budget 1000000

Headers Total Overhead per month Fixed Overhead per month
Engine Assembly 9800000 1700000
Metal Stamping 8100000 2700000
Model 101 Assembly 6200000 2700000
Model 102 Assembly 5250000 1500000
Total 29350000 8600000
 Maximize Function 3400000
Perunit Cost Model 101 36000
Per Unit Cost Model 102 33000
Fixed Overhead 8600000

LHS RHS % Utilization

4500 <= Infinity
6000 <= 6000 100%
3000 <= 5000 60%
4500 <= 4500 100%
Microsoft Excel 16.0 Answer Report
Worksheet: [Merton Case Study.xlsx]1(d)
Report Created: 4/18/2020 3:51:38 AM
Result: Solver found a solution. All Constraints and optimality conditions are satisfied.
Solver Engine
Engine: Simplex LP
Solution Time: 0.094 Seconds.
Iterations: 2 Subproblems: 0
Solver Options
Max Time Unlimited, Iterations Unlimited, Precision 0.000001, Use Automatic Scaling
Max Subproblems Unlimited, Max Integer Sols Unlimited, Integer Tolerance 1%, Assume NonNegative

Objective Cell (Max)

Cell Name Original Value Final Value
$E$8 Maximize Function 2600000 3400000

Variable Cells
Cell Name Original Value Final Value Integer
$B$9 Quantity per month Model 101 1900 1500 Contin
$C$9 Quantity per month Model 102 1100 1500 Contin

Constraints
Cell Name Cell Value Formula Status Slack
$D$20 Metal Stamping LHS 6000 $D$20<=$F$20 Binding 0
$D$21 Model 101 Assembly LHS 3000 $D$21<=$F$21 Not Binding 2000
$D$22 Model 102 Assembly LHS 4500 $D$22<=$F$22 Binding 0
$B$9 Quantity per month Model 101 1500 $B$9>=0 Not Binding 1500
$C$9 Quantity per month Model 102 1500 $C$9>=0 Not Binding 1500
Microsoft Excel 16.0 Sensitivity Report
Worksheet: [Merton Case Study.xlsx]1(d)
Report Created: 4/18/2020 3:51:38 AM

Variable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$B$9 Quantity per month Model 101 1500 0 3000 2000 3000
$C$9 Quantity per month Model 102 1500 0 5000 1E+030 2000

Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$D$20 Metal Stamping LHS 6000 1500 6000 2000 3000
$D$21 Model 101 Assembly LHS 3000 0 5000 1E+030 2000
$D$22 Model 102 Assembly LHS 4500 666.66666667 4500 4500 3000
Q-2

Variables
Model 101 Model 102 Objective
1500 1500 3400000
Microsoft Excel 16.0 Answer Report
Worksheet: [Merton Case Study.xlsx]3(b)
Report Created: 4/18/2020 2:50:21 AM
Result: Solver found a solution. All Constraints and optimality conditions are satisfied.
Solver Engine
Engine: Simplex LP
Solution Time: 0.047 Seconds.
Iterations: 3 Subproblems: 0
Solver Options
Max Time Unlimited, Iterations Unlimited, Precision 0.000001, Use Automatic Scaling
Max Subproblems Unlimited, Max Integer Sols Unlimited, Integer Tolerance 1%, Assume NonNegative

Objective Cell (Max)

Cell Name Original Value Final Value
$F$2 Maximize Function 2400000 2400000

Variable Cells
Cell Name Original Value Final Value Integer
$B$3 Quantity per month Model 101 2000 2000 Contin
$C$3 Quantity per month Model 102 1000 1000 Contin
$D$3 Quantity per month Model 103 0 0 Contin

Constraints
Cell Name Cell Value Formula Status Slack
$E$16 Engine Assembly Fixed Overhead 4000 $E$16<=$G$16 Binding 0
$E$17 Metal Stamping Fixed Overhead 6000 $E$17<=$G$17 Binding 0
$E$18 Model 101 Assembly Fixed Overhead 4000 $E$18<=$G$18 Not Binding 1000
$E$19 Model 102 Assembly Fixed Overhead 3000 $E$19<=$G$19 Not Binding 1500
Microsoft Excel 16.0 Sensitivity Report
Worksheet: [Merton Case Study.xlsx]3(b)
Report Created: 4/18/2020 2:50:21 AM

Variable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$B$3 Quantity per month Model 101 2000 0 3000 2000 500
$C$3 Quantity per month Model 102 1000 0 5000 1000 2000
$D$3 Quantity per month Model 103 0 -350 2000 350 1E+030

Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$E$16 Engine Assembly Fixed Overhead 4000 2000 4000 500 500
$E$17 Metal Stamping Fixed Overhead 6000 500 6000 500 1000
$E$18 Model 101 Assembly Fixed Overhead 4000 0 5000 1E+030 1000
$E$19 Model 102 Assembly Fixed Overhead 3000 0 4500 1E+030 1500
Microsoft Excel 16.0 Limits Report
Worksheet: [Merton Case Study.xlsx]3(b)
Report Created: 4/18/2020 2:50:22 AM

Objective
Cell Name Value
$F$2 Maximize Function 2400000

Variable Lower Objective Upper Objective

Cell Name Value Limit Result Limit Result
$B$3 Quantity per month Model 101 2000 0 -3600000 2000 2400000
$C$3 Quantity per month Model 102 1000 0 -2600000 1000 2400000
$D$3 Quantity per month Model 103 0 0 2400000 0 2400000
Q - 3(a)
Name Model 101 Model 102
Quantity per month 2000 1000
Selling Price 39000 38000
Profit per unit 3000 5000

Name Model 101 Model 102

Engine Assembly 4000
Metal Stamping 6000
Model 101 Assembly 4000 0
Model 102 Assembly 0 3000
Constraints
Engine Assembly 1 2
Metal Stamping 2 2
Model 101 Assembly 2 0
Model 102 Assembly 0 3

Specification Model 101 Model 102

Cost of Material 24000 20000
Direct Labour
Engine Assembly 1200 2400
Metal Stamping 800 600
Final Assembly 2000 1500
Total DL 4000 4500
Total DL incld Cost of Mat 28000 24500
Overhead
Engine Assembly 2525 4850
Metal Stamping 3480 3080
Final Assembly 6200 3500
Total Overhead 12205 11430
Variable Overhead
Engine Assembly 2100 4000
Metal Stamping 2400 2000
Final Assembly 3500 2500
Total Variable Overhead 8000 8500
Variable Overhead*Monthly producti 8000000 12750000

Total Variable Cost per Unit 36000 33000

Overhead Budget 1000000

Headers Total Overhead per month
Fixed Overhead per month
Engine Assembly 9800000 1700000
Metal Stamping 8100000 2700000
Model 101 Assembly 6200000 2700000
Model 102 Assembly 5250000 1500000
Total 29350000 8600000
Model 103 Maximize Function 2400000
0 Perunit Cost Model 101 36000
7230 Per Unit Cost Model 102 33000
2000 Per Unit Cost Model 103 5230
Fixed Overhead 8600000
Model 103

0.8 4000 <= 4000

1.5 6000 <= 6000
1 4000 <= 5000
0 3000 <= 4500

Model 103

1680
1800
1750
5230

5230
Q - 3(b)

Model 101 Model 102 Model 103 Objective

0 857.14286 2857.1429 2402857

Name Model 101 Model 102 Model 103

Quantity per month 0 857.14286 2857.1429
Selling Price 39000 38000 7581
Profit per unit 3000 5000 2351

Name Model 101 Model 102 Model 103

Engine Assembly 4000
Metal Stamping 6000
Model 101 Assembly 4000 0
Model 102 Assembly 0 3000
Constraints
Engine Assembly 1 2 0.8
Metal Stamping 2 2 1.5
Model 101 Assembly 2 0 1
Model 102 Assembly 0 3 0

Specification Model 101 Model 102 Model 103

Cost of Material 24000 20000
Direct Labour
Engine Assembly 1200 2400
Metal Stamping 800 600
Final Assembly 2000 1500
Total DL 4000 4500
Total DL incld Cost of Mat 28000 24500 0
Overhead
Engine Assembly 2525 4850
Metal Stamping 3480 3080
Final Assembly 6200 3500
Total Overhead 12205 11430
Variable Overhead
Engine Assembly 2100 4000 1680
Metal Stamping 2400 2000 1800
Final Assembly 3500 2500 1750
Total Variable Overhead 8000 8500 5230
Variable Overhead*Monthly 8000000 12750000

Total Variable Cost per Unit 36000 33000 5230

Overhead Budget 1000000

Headers Total Overhead per month
Fixed Overhead per month
Engine Assembly 9800000 1700000
Metal Stamping 8100000 2700000
Model 101 Assembly 6200000 2700000
Model 102 Assembly 5250000 1500000
Total 29350000 8600000
 Maximize Function 2402857
Perunit Cost Model 101 36000
Per Unit Cost Model 102 33000
Per Unit Cost Model 103 5230
Fixed Overhead 8600000

% Utilization
4000.00004 <= 4000 100%
6000.00007 <= 6000 100%
2857.1429 <= 5000 57%
2571.42858 <= 4500 57%
Q-4
Production
Variable for Production Model 101 Model 102
Qty Per month 1500 1500
Selling Price 39000 38000

Constraints

Engine Assembly 1 2
Metal Stamping 2 2
Model 101 Assembly 2 0
Model 102 Assembly 0 3
Non Negative Model 101 1 0
Non Negative Model 102 0 1

Specification Model 101 Model 102

Cost of Material 24000 20000
Direct Labour
Engine Assembly 1800 3600
Metal Stamping 800 600
Final Assembly 2000 1500
Total DL 4600 5700
Overhead
Engine Assembly 2525 4850
Metal Stamping 3480 3080
Final Assembly 6200 3500
Total Overhead 12205 11430
Variable Overhead
Engine Assembly 2100 4000
Metal Stamping 2400 2000
Final Assembly 3500 2500
Total Variable Overhead 8000 8500
Variable Overhead*Monthly production rate 8000000 12750000

Total Variable Cost per Unit 36600 34200

Overhead Budget 1000000

Headers Total Overhead per month
Fixed Overhead per month
Engine Assembly 9800000 2450000
Metal Stamping 8100000 2700000
Model 101 Assembly 6200000 2700000
Model 102 Assembly 5250000 1500000
Total 29350000 9350000
 Amount
Maximize Function -50000
Perunit Cost Model 101 36600
Per Unit Cost Model 102 34200
Fixed Overhead 9350000

LHS RHS
4500 <= 6000
6000 <= 6000
3000 <= 5000
4500 <= 4500
1500 >= 0
1500 >= 0
Q-5

Variables
Production Model 101 Model 102
Variable For Production x1 x2
Qty Per month 2250 750
Selling Price 39000 38000

Constraints
Engine Assembly 1 2
Metal Stamping 2 2
Model 101 Assembly 2 0
Model 102 Assembly 0 3
Non Negative Model 101 1 0
Non Negative Model 102 0 1
Product Ratio Constraint 1 3

Specification Model 101 Model 102

Cost of Material 24000 20000
Direct Labour
Engine Assembly 1200 2400
Metal Stamping 800 600
Final Assembly 2000 1500
Total DL 4000 4500
Overhead
Engine Assembly 2525 4850
Metal Stamping 3480 3080
Final Assembly 6200 3500
Total Overhead 12205 11430
Variable Overhead
Engine Assembly 2100 4000
Metal Stamping 2400 2000
Final Assembly 3500 2500
Total Variable Overhead 8000 8500
Variable Overhead*Monthly production rate 8000000 12750000

Total Variable Cost per Unit 36000 33000

Overhead Budget 1000000

Headers Total Overhead per month Fixed Overhead per month
Engine Assembly 9800000 1700000
Metal Stamping 8100000 2700000
Model 101 Assembly 6200000 2700000
Model 102 Assembly 5250000 1500000
Total 29350000 8600000
Maximize Amount
Profit(Sell-Cost) 1900000
Perunit Cost Model 101 36000
Per Unit Cost Model 102 33000
Fixed Overhead 8600000

3750 <= 4000

6000 <= 6000
4500 <= 5000
2250 <= 4500
>= 0
>= 0
0 >= 0