Merton Truck Company Case

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What is the objective of Merton

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• Objective is to maximize profits for Merton

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Why Merton is not able to increase profits

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 Possible Reasons
• Wrong decisions on production quantities

• Capacity problems

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What decision the Merton has to take to
increase profits

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• Selection of appropriate production quantities
for both models that maximize profits

• These are called decision variables in

mathematical programming language.

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 Representing linear program in
mathematical form
• Representation of decision variables
• Representation of objective function
• Representation of constraints

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 Representation of Decision Variable
• Let X1 denote the number of Model 101 units
that should be produced

• Let X2 denote the number of Model 102 units

that needs to be produced

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 Representation of Objective Function
• Profits = Contribution – Fixed Cost

• Where contribution = revenue – variable production

costs

• Selection of functional form to represent sub terms .

• Linear ?
• Non linear – logarithmic, exponential ?
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 We need to ask following questions to
ourselves
• How does Revenue, variable production cost,
production time functions vary with the production
quantity ?

• Proportional – are functions proportional to the level

of production quantity
• Additive – do production quantity level affect above
relationship s
• Divisible – can quantities be fractional
• Certainty
• Data 11
• Selection of Linear Model in our case

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 Calculation of correct per unit production
costs and overheads !
•

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 Model 101 Variable Production Cost
• Direct Materials : 24000 $

• Direct Labor : Engine + Stamping + Final Assmb

• = 1200 + 800 + 2000 = 4000

Variable Overhead = Engine+ Metal + 101 Assmb

= 2100 + 2400 + 3500=8000

Per unit Variable Production Cost for 101 = 36000

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 Model 101 Contribution
• Model 101 per unit contribution =
• Selling price per unit - variable cost per unit
• 39000 – 36000 = 3000 dollars

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 Representation of Objective Function
• Metron’s Profits =

• 3000 X1 + 5000 X2 - 8.6 (millions)

• Can we get the profits that we want ?

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 Representation of Constraint
• Engine Assembly Constraint ?

• 1 X1 + 2 X2 <= 4000

• What would be stamping department

constraint ?

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 Final Assembly Constraint
• 101 Assembly constraint

• 2 X1 <= 5000

• What would be 102 Assembly constraint ?

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 Final Mathematical Model
• Maximize : 3000 X1 + 5000 X2 - 8.6 (millions)

• Subject to constraints :
• 1 X1 + 2 X2 <= 4000 engine
• 2X1 + 2X2 < = 6000 stamping
• 2 X1 <= 5000 101 Assembly
• 3 X2 <= 4500 102 Assembly

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What Next ?

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 Solution Process
• Software's such as Solver ( limited version in
Excel, unlimited could be purchased from
Frontline solvers), Ilog-Cplex and Xpress are
well-known and widely used.

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