Anuj Sharma (08) | Harsh Yadav (18) | Monisha Mehrotra (26)

Subharthi Sen (52) | U. Satya Naga Vineeli (56)

Merton's financial performance was unsatisfactory

2.
Operating at capacity in some production lines
3.
2 specialized models of trucks: Model 101 & Model 102
4.
4 departments and capacities
1. Engine Assembly
- 100%
2. Metal Stamping
- 83.3%
3. Model 101 Assembly
- 40%
4. Model 102 Assembly
- 100%
5.
Total machine hours available: 4000
6.
They can sell the complete produce
7.
Current monthly output: 1000 Model 101, 1500 Model 102
1.

Sales Manager :

1.
1.
2.

Stop making Model 101 trucks

Model 101: $39,000, Model 102: $38,000

Controller :

2.
1.
2.

Trying to absorb fixed overhead of Model 101 assembly

Increase production of Model 101

Production Manager:

3.
1.

2.
3.
4.

Increase Model 101 without cutting back Model 102

Purchase Model 101 or 102 engines from outside supplier
Reduce capacity problem in engine assembly
Reimburse supplier for labour and overhead

1.
2.
3.
4.
5.

Best product mix for Merton ?

Best Product mix if capacity is raised from 4000 to 4001
machine hours ?
Worth of extra unit of capacity?
If capacity is increased to 4100 machine hours,
contribution will increase by 100 times. Verify.
How many units of engine capacity can be added to
change the value of additional capacity?

1.

Best Product Mix for Merton:

A

2.

101

Profit

$3,000.00

Units

2000

102
$5,000.00
1000

Contribution and Profit:

Contribution

Fixed cost

$11,000,000.00
Profit=

8600000
$2,400,000.00

Final Shadow Constraint Allowable Allowable

Cell
$D$11

Name
Engine Assembly Total
Machine Hr per month

Value
4000

Price
2000

R.H. Side Increase Decrease

4000

500

Shadow Price of Engine Assembly = $ 2000

So, Increase in Assembly unit capacity = 1 (4000 to 4001)
Worth of extra unit of Capacity = 1 * 2000
= $ 2000

500

1.

New Best Product Mix for Merton:

A
Profit
Units

2.

101
$3,000.00
1999

102
$5,000.00
1001

New contribution and Profit:

Contribution

Fixed cost
$11,002,000.00
Profit=

8600000
$2,402,000.00

Final Shadow Constraint Allowable Allowable

Cell
$D$11

Name
Engine Assembly Total
Machine Hr per month

Value
4000

Price
2000

R.H. Side Increase Decrease

4000

500

Shadow Price of Engine Assembly = $ 2000

So, Increase in Assembly unit capacity = 100 (4000 to 4100)
Worth of extra unit of Capacity = 100 * 2000
= $ 200,000

500

1.

New Best Product Mix for Merton:

A

2.

101

Profit

$3,000.00

Units

1900

$5,000.00
1100

New Profit:

Net Profit
3.

102

$2,600,000.00

New Contribution:
Initial Contribution
Contribution in part(b)
Contribution in part(c)

11000000
$11,002,000.00
$11,200,000.00
Times increase

Increase
$2,000.00
$200,000.00
100

Final Shadow Constraint Allowable Allowable

Cell
$D$11

Name
Engine Assembly Total
Machine Hr per month

Value
4000

Price
2000

R.H. Side Increase Decrease

4000

500

500

Allowable increase depicts the maximum number of Assembly

engine capacity that can be added without changing the
capacity worth.
Thus, 500 units of engine assembly capacity can be added.

Alternative suggested by Production Manager

1.
1.
2.
3.

Should the company adopt this alternative?

Maximum rent ?
Maximum number of machine hours to be rented ?

Final Shadow Constraint Allowable Allowable

Cell
$D$11

Name
Engine Assembly Total
Machine Hr per month

Value
4000

Price
2000

R.H. Side Increase Decrease

4000

500

500

Since allowable increase is 500, so maximum hours for which

renting is possible is 500 hours.
Since each hour increases contribution by 2000, so maximum
rent to be paid per hour is $2000

1.

The company can go for this alternative if

rent paid is below $2000. Any rent below this
amount will be profitable for the company
New Best Product Mix for Merton:
A

2.

101

Profit

$3,000.00

Units

1500

102
$5,000.00
1500

New contribution and Profit:

Contribution

Fixed cost
$12,000,000.00

Profit=

8600000
$3,400,000.00

Given:
1.
2.
3.

4.
5.
6.

Model 103 to be introduced

Contribution : $ 2000
Total Engine Assembly Capacity = 5000 per month
Total Metal Stamping Capacity = 4000 per month
Assembled in Model 101 assembly department
Requires half the time of Model 101 truck

Questions:
1.
Should they produce Model 103?
2.
When is it worthwhile to produce it?

1.

New Best Product Mix for Merton:

A

101

Profit

$3,000.00

Units

2000

2.

102

103

$5,000.00

$2,000.00

1000

New contribution and Profit:

Contribution

Fixed cost
$11,000,000.00

Profit=

8600000
$2,400,000.00

We can see from the sensitivity report that if

we want to introduce Model 103 into solution
then its contribution should be increased by
at least by 351.
Final Reduced Objective Allowable Allowable

Cell

Name

Value

Cost

Coefficient Increase

Decrease

$C$64 Units Model 101

2000

3000

2000

500

$D$64 Units Mdel 102

1000

5000

1000

2000

$E$64 Units Mdel 103

-350

2000

350

1E+30

Given:
1.
Engine can be assembled on overtime
2.
Production Efficiency unchanged
3.
Overtime capacity = 2000 machine hours
4.
Direct labour costs = 50% higher for overtime
5.
Variable overheads unchanged
6.
Monthly fixed overhead for engine assembly department
increases by $0.75 million
Question:
Should they assemble engines overtime?

1.

New Best Product Mix for Merton:

A

2.

101

Profit

$3,000.00

Units

1500

102
$5,000.00
1500

New contribution and Profit:

Contribution
$12,000,000.00

Fixed cost
8600000

Profit=

$3,400,000.00

Net Profit

$2,350,000.00

With the application of overtime in the

engine assembly department, the net
contribution reaches to $2,350,000

Increased Fixed Cost

750000

750000

Increase in Labor

250*3600

900000

Cost saving

500*1200

600000

Total increase

1050000

Mertons Presidents opinion:

1.
Maximizing short-run contribution not good in long run
2.
Maximize Model 101 production

Agreed:
1.
Number of Model 101 >= 3 x Number of Model 102
2.
Maximize Contribution
Question:
Resulting optimal product mix?

1.

New Best Product Mix for Merton after addition of constraint:

A

101

Profit

$3,000.00

Units

2250

2.

102
$5,000.00
750

New contribution and Profit:

Contribution
Fixed cost
$10,500,000.00
Profit=

8600000
$1,900,000.00