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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.

1.
1.
2.

Sales Manager :
Stop making Model 101 trucks Model 101: $39,000, Model 102: $38,000

2.
1. 2.

Controller :
Trying to absorb fixed overhead of Model 101 assembly Increase production of Model 101

3.
1.

Production Manager:
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
Profit Units

101
$3,000.00 2000

102
$5,000.00 1000

2.

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 500 500

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

1.

New Best Product Mix for Merton:

A Profit Units

101 $3,000.00 1999

102 $5,000.00 1001

2.

New contribution and Profit:


Contribution $11,002,000.00 Profit= Fixed cost 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 500 500

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

1.

New Best Product Mix for Merton:


A Profit Units 101 $3,000.00 1900 102 $5,000.00 1100

2.

New Profit:

Net Profit
3.

$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.

1.
1. 2. 3.

Alternative suggested by Production Manager


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

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
Profit Units

1.

101
$3,000.00 1500

102
$5,000.00 1500

2.

New contribution and Profit:


Contribution
$12,000,000.00 Profit=

Fixed cost
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 $3,000.00 2000 102 $5,000.00 1000 103 $2,000.00 0

Profit Units

2.

New contribution and Profit:


Fixed cost $11,000,000.00 8600000 $2,400,000.00

Contribution Profit=

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 Name Value 2000 1000 0 Cost 0 0 -350 Coefficient Increase 3000 5000 2000 2000 1000 350 Decrease 500 2000 1E+30

Cell

$C$64 Units Model 101 $D$64 Units Mdel 102 $E$64 Units Mdel 103

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 Profit Units 101 $3,000.00 1500 102 $5,000.00 1500

2.

New contribution and Profit:


Contribution $12,000,000.00 Profit= Net Profit Fixed cost 8600000 $3,400,000.00 $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


Increase in Labor Cost saving Total increase

750000
250*3600 500*1200

750000
900000 600000 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 $3,000.00 2250 102 $5,000.00 750

Profit Units

2.

New contribution and Profit:


Contribution Fixed cost $10,500,000.00 Profit=

8600000 $1,900,000.00