SVKM’s

NMIMS Hyderabad

Academic Year 2023-2024

Subject: MOBD
Group Assignment
Merton Truck company Case Study
Group No 3, Division C

Group Details:
Name Roll No
Darchana Choudhury E152
Ankita Raj E153
Ashmita Dhar E154
Chiranjeev Malviya E155
Pavitra Luhadia E156
Dravya Rajpura E157

- Professor Dr.
Chandrakant Vani

1
Calculating contribution for each truck,

Contribution for model 101 = selling price – (direct mat. + direct labour + variable o/h)
= 39000 – (24000 + 4000 + 8000)
= Rs. 3000/-

Contribution for model 102 = selling price – (direct mat. + direct labour + variable o/h)
= 38000 – (20000 + 4500 + 8500)
= Rs. 5000/-

Decisions variables:

x1 = number of model 101 trucks produced,

The algebraic formulation is:

Max. 3000.x1 + 5000.x2,

Constrains,
1.x1 + 2.x2 ≤ 4000,
2.x1 + 2.x2 ≤ 6000,
2.x1 +……… ≤ 5000,
……..+ 3.x2 ≤ 4500,
x1, x2 ≥ 0.

2
Q1.
A. Find the best product mix for Merton.

Best product mix for Merton would be

B. What would be the best product mix if engine assembly capacity were raised by one
unit, from 4,000 to 4,001 machine-hours? What is the extra unit of capacity worth?

As shown best product mix after raising the capacity by one unit of machine-hour

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would be model-101 1999 trucks and model-102 1001 trucks.
Extra unit of capacity worth is (11002000 – 11000000) Rs. 2000.

C. Assume that a second additional unit of engine assembly capacity is worth the same
as the first. Verify that if the capacity were increased to 4,100 machine- hours, then
the increase in contribution would be 100 times that in part (b).

If we increase the one unit in machine hour capacity increases the contribution by Rs. 2000/-
as
we seen in Q.1 (b) . whereas if we increase the capacity by 100 units of machine hour i.e
from
4000 to 4100 contribution increases by Rs. 200000/- . which is (2000 * 100 times) 100 times
of
Rs. 2000/-. Hence it is been verified.

D. How many units of engine assembly capacity can be added before there is a change in
the value of an additional unit of capacity?

4
Finding the value of x1 and x2 using equation
>> 2.(x1) + 2.(x2) = 6000
>> 3.(x2) = 4500
So we get,
X2 = 1500, and x1 = 1500
With the further increase in unit of capacity of engine assembly machine hour (from 4500 to
4501) there is no change in the contribution.
So no. of units can be added calculated below,
Substituting the value of x1 and x2 in the below equation,
= 1.(x1) + 2.(x2)
= 1.(1500) + 2.(1500)
= 4500
Therefore, unit can be added is (4500 – 4000 = 500).

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Q.2 Merton's production manager suggests purchasing Model 101 or Model 102 engines
from an outside supplier in order to relieve the capacity problem in the engine assembly
department. If Merton decides to pursue this alternative, it will be effectively "renting"
capacity: furnishing the necessary materials and engine components, and reimbursing the
outside supplier for labor and overhead. Should the company adopt this alternative? If so,
what is the maximum rent it should be willing to pay for a machine-hour of engine assembly
capacity? What is the maximum number of machine-hours it should rent?

Company should adopt this alternative as we seen in Q1 (b) and Q (d). increase in one unit
of capacity inceases contribution by Rs. 2000/- and company should rent 500 machine hours
till which contribution increases after that there is no change in contribution of increased unit
in
capacity. So it is obvious that company should be willing to pay Rs. 2000/- for a rented
machine
hour.

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Q3. Merton is considering the introduction of a new truck, to be called Model 103. Each
Model 103 truck would give a contribution of $2,000. The total engine assembly capacity
would be sufficient to produce 5,000 Model 103s per month, and the total metal stamping
capacity would be sufficient to produce 4,000 Model 103s. The new truck would be
assembled in the Model 101 assembly department, each Model 103 truck requiring only half
as much time as a Model 101 truck.
(a) Should Merton produce Model 103 trucks?
(b) How high would the contribution on each Model 103 truck have to be before it
became worthwhile to produce the new model?

x1 = number of model 101 trucks produced,

The algebraic formulation is:

Max. 3000.x1 + 5000.x2 + 2000.x3,

Constrains,
1.x1 + 2.x2 + 0.8.x3 ≤ 4000,
2.x1 + 2.x2 + 1.5.x3 ≤ 6000,
2.x1 +………+ 1.x3 ≤ 5000,
……..+ 3.x2 +……… ≤ 4500,
x1, x2, x3 ≥ 0.

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(a) Merton company should not produce model 103 trucks. As it is been clearly shown in
the above result that there is no change in the contribution and also optimum solution
is derived by not producing the any truck of model 103.
(b) Contribution on model 103 would be as high as Rs.2350/- before it becomes worthwhile
to produce. We can see that in above table in maximum objective coeff. Column .
If we further increase the contribution by even Rs. 1/- it becomes worth while to
produce the new model

Q4. Engines can be assembled on overtime in the engine assembly department. Suppose
production efficiencies do not change and 2,000 machine-hours of engine assembly overtime
capacity are available. Direct labor costs are higher by 50% for overtime production. While
variable overhead would remain the same, monthly fixed overhead in the engine assembly
department would increase by $0.75 million. Should Merton assemble engines on overtime?

Contribution for model 101 = selling price – (direct mat. + direct labour + variable o/h)
= 39000 – (24000 + 6000 + 8000)
= Rs. 1000/-

Contribution for model 102 = selling price – (direct mat. + direct labour + variable o/h)
= 38000 – (20000 + 6750 + 8500)
= Rs. 2750/-

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Q5. Merton's president, in arguing that maximizing short-run contribution was not necessarily
good for the company in the long run, wanted to produce as many Model 101s as possible.
After some discussion, it was agreed to maximize the monthly contribution as long as the
number of Model 101 trucks produced was at least three times the number of Model 102s.
What is the resulting "optimal" product mix?

As asked in the question model 101 truck has to atleast 3 times the model 102 trucks.
So introducing 5th constrain as follow,
x1 ≥ 3x2
x1 – 3x2 ≥ 0
Resulting optimum product mix is
Model 101 truck – 2250 nos
Model 102 truck – 750 nos.