Merton Truck Company

OR Case-1
Group-3
M223-21 Amruta Rajendra Nannaware
M224-21 Anand Kumar
M227-21 Anisha Pradhan
M252-21 Madhur Dixit
M254-21 Manav Raheja
M256-21 Mayank Tiwari
M263-21 Neha Lata
M275-21 Pratiksha Kujur
M292-21 Shivam Kalra
M296-21 Sindhu N Naik
M298-21 Soumeen Satyaban
M313-21 Vipul Choudhary
M315-21 Vivek Rohit
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Problem Statement
Merton is a truck producing company which is not performing
well in its financial statement
They need an action plan for improving their financial position
The president is thinking of the following alternatives -
a. Introduction of a new truck model -Model 103
b. Stop the production of Model 101 Truck
c. Purchasing engines from an outside supplier
d. Optimizing the capacity of the Model 101 truck department
and Engine assembly department
e. Higher Overhead costing for 1000units of Model 101 Truck
f. Optimum product mix of Model 101 and Model 102 Truck
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We get contribution margin
per unit of M101 and M102
truck as $3000 and $ 5000
respectively

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1a) Find the best product mix for Merton
We know the contribution margin of Model 101and Model 102 truck is $3000 is $5000
Therefore our problem statement will be -
Objective : Max 3000x + 5000 y ( Let x= Model 101 Truck and y = Model 102 Truck)
Constraints : 1x+2y <= 4000 ; 2x <=5000
2x +2y <= 6000 ; 3y <= 4500

Optimum Product Mix

Model 101 - 2000 units

Model 102 - 1000 units

Total Contribution
Margin
= $ 11000000

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1b) Engine capacity is increased from 4000 to 4001 hrs

Objective : Max 3000x + 5000 y ( Let x= Model 101 Truck and y = Model 102 Truck)
Constraints : 1x+2y <= 4001 ; 2x <=5000
2x +2y <= 6000 ; 3y <= 4500

Optimum Product Mix

Model 101 - 1999units

Model 102 - 1001 units

Total Contribution Margin

= $ 11002000

We see $ 2000 of increase

in contribution margin

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1c) Engine capacity is increased from 4000 to 4100 hrs

Objective : Max 3000x + 5000 y ( Let x= Model 101 Truck and y = Model 102 Truck)
Constraints : 1x+2y <= 4100 ; 2x <=5000
2x +2y <= 6000 ; 3y <= 4500

Optimum Product Mix

Model 101 - 1900 units

Model 102 - 1100 units

Total Contribution Margin

= $ 11200000

We see $ 200000 of
increase in contribution
margin

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1d) How many Engine assembly capacity can be added before there is any change in value of
additional unit of capacity?
By removing the constraint of maximum engine assembly shop hours we get 4500hrs which has
increased capacity by $1000000

Optimum Product Mix

Model 101 - 1500units

Model 102 - 1500 units

Total Contribution Margin

= $ 12000000

We see $ 1000000 of
increase in contribution
margin by increasing
500hrs of engine assembly
machine hours
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2) As we saw in the 1d solution, if we increase the capacity of the engine assembly shop by
500hrs, we get an increase in contribution margin by $1000000. Still, since our existing engine
capacity is only 4000hrs, we can outsource a maximum of 500 engine hrs. The capacity
requirement from the supplier and pay $2000 rent max.

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3a. Should Merton produce Model 103 trucks?
Objective :
Max 3000x + 5000 y+2000z ( Let x= Model 101 Truck, y = Model 102 Truck and z = Model 103
Truck)
Constraints : 1x+2y+8z <= 4000 ; 2x+2y+2z <=6000; 2x+1z <=5000, 3y <= 4500

We should not produce

Model 103

3b. How high would the contribution on each Model 103 truck have to be before it became
worthwhile to produce the new model?
No need to calculate as we are not producing model 103 but if we want to include 103 model then it's
minimum contribution margin per unit should be more than $ 3000
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4) By running the engine in overtime we increase Fixed cost by $0.75 million, DLC increases by 50% due
to which contribution margin of each model will decrease, resulting in a total contribution margin of
$11700000, but on the contrary, we see an increase in fixed cost hence total loss incurred is of $50000
so it is better to run the engine in its regular time.
X1 = number of model 101 trucks produced by using engine in regular time
X2 = number of model 102 trucks produced by using engine in regular time
X3 = number of model 101 trucks produced by using engine in overtime
X4 = number of model 102 trucks produced by using engine in overtime

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5 ) Objective Function: Maximize 3000x + 5000y ( Let x= Model 101 Truck and
y = Model 102 Truck)
Constraints: x + 2y ≤ 4000; 2x +2y ≤ 6000; 2x ≤ 5000; 3y ≤ 5000
Optimal Product Mix : Model 101 - 2250 units; Model 102 - 750 units
Total Contribution Margin = $ 10500000

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Thank You !

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