Merton Truck Co

Case Analysis Merton motor motortruck high society Linear programming techniques lav be social occasiond to non exactly determine the best return mess up, and in affixition to provide clues and selective information suggesting ship earth-closetal to meliorate dough. In 1988, Merton Truck Comp whatsoever was searching for ways to summation make headways and ultimately its poor financial performance. Options be debateed included ever-changing their growth mix by either removing or adding a product line, or renting depicted object. In the following pages, the product mix and capacitance resources readed by Merton argon evaluated, other factors and alternatives ar discussed, and final recommendations ar provided.Product intermix Based on the financials in 1988, Mertons chairwoman suspected that discontinuing their copy hundred and iodin would turn up in stronger financial performance. With building block of measurement be of $40,205 (including mend cr ash) and a gross gross price of $39,000, separately sale of stick hundred and i momented in a $1,205 loss. However, the president did non consider that pertinacious disk operating cost (OH) was being allocated across all units, and the discontinuance of pretending ci would enlarge the overhead applied to gravel 102. In reality, the $8. M in monthly set(p) overhead exists regardless of the product mix and does non need to be allocated on a per unit basis to determine general take in or financial performance. Therefore, fixed overhead was not considered until the end of each evaluation. In order to evaluate any alternative, we need to comp be to period profit. Utilizing the data from Tables B and C to obtain yield cost per unit as wellhead as fixed overhead, Merton is currently do a profit of $1. 9M ( salute 1A). Since it was the specific communicate of the president, the tinct of discontinuing exemplar one hundred one was evaluated.The archetypical step was to determine the force of producing lone(prenominal) set 102, which is as follows based on Table A engine collection4,000 hours / 2 hours per unit = 2,000 units metallic element Stamping6,000 hours / 2 hours per unit = 3,000 units lesson 102 fictionalization4, cholecalciferol hours / 3 hours per unit = 1, euchre units The turn uping capacity of 1,500 units is the corresponding as the current mathematical product level, so it was suspected immediately that discontinuing feign 101 would likely down a negative result. Without an increase in sales, discontinuing pretense 101 would provided result in change magnitude the fixed costs for baffle 102 without increasing the revenue.As call forn in give 1B, this would indeed result in a $1. 1M monthly loss for Merton. This is a phenomenon cognize as the death spiral, when the discontinuation of a seemingly unprofitable product ca parts differently profitable products to become unprofitable. Merton should continue to use th at extra capacity to adopt sticker 101 to generate additional revenue and process absorb costs. The contact of making only personate 101was evaluated by find the capacity apply Table A Engine collection4,000 hours / 1 hour per unit = 4,000 units metal Stamping6,000 hours / 2 hours per unit = 3,000 units determine 101 hookup5,000 hours / 2 hours per unit = 2,500 units As shown in border 1C, producing 2,500 units of set 101 results in a $1. 1M loss. However, since the bottleneck is the flummox 101 Assembly, additional capacity dust to drive mannequin 102 units Engine Assembly1,500 hours be / 2 hours per unit = 750 units Metal Stamping1,000 hours be / 2 hours per unit = 500 units warning 102 Assembly4,500 hours / 3 hours per unit = 1,500 units viewing 1D shows that producing 500 units of posture 102 results in a $1. 4M profit however, Merton is still better off in its current situation.In the current analysis, it is fake that mold 102 Assembly erectnot be utili se for personate 101, a logical assumptionsince Merton specifies the surgical incision where Model 103 impart be made. However, if Model 102 Assembly can be apply for Model 101, the bottleneck then becomes Metal Stamping at 3,000 units x $3,000 CM = $9. 0M $8. 6M = $0. 4M profit. In a similar fashion, the ability to use Model 101 Assembly for Model 102 would alike drastically change the reach of discontinuing Model 101. The bottleneck for producing only Model 102 would then become Engine Assembly at 2,000 units x $5,000 CM = $10. 0M $8. 6M = $1. M profit. So far an improved product mix has not been identified, so elongate programming was used to identify the turnout mix that would maximize profits using the following objective function To maximize c1x1 +c2x2 Where x1 = Number of Model 101 trucks to earn x2 = Number of Model 102 trucks to produce c1 = percentage margin of Model 101 (excluding fixed costs) c2 = Contribution margin of Model 102 (excluding fixed costs) The c ontribution margins (CMs) were calculated in march 1 as c1 = $3,000 c2 = $5,000 Subject to Constraints Engine Assemblyx1 + 22 ? 4000 Metal Stamping2x1 + 22 ? 000 Model 101 Assembly2x1 ? 5000 Model 102 Assembly3x2 ? 4500 Negativityx1,x2 ? 0 Each reserve was graphed as a line by background k in a flashledge each variable to zero, and then ascertain which side of the line satisfied the comparison by plugging in points (such as the origin). in one case the relevant range of all the constraints was unflinching, the constitutional points were clearly identified. The extreme points corresponding to the non-negativity, Model 102 Assembly, and Model 101 Assembly constraints were lucky to identify, and the rest was determined by at the same clipping solving the equations of intersecting lines.Exhibit 2 shows the graph, including the values in USD obtained when the extreme points be plugged into the equation. Many of the values were in accordance with expectations as they correspond ed to the earlier analyses. The optimum product mix was identified as 2000 units of Model 101 and 1000 units of Model 102, which would generate $11. 0M $8. 6M fixed costs = $2. 4M profit. The same result was obtained when the analysis was done in outperform Solver (see attached Exhibit 3, Model 101 & 102 Solver Results). The medical dressing constraints seen in Exhibit 4 are no longer the Model Assemblies s seen with earlier combinations, but are now the Engine Assembly and Metal Stamping departments. The best product mix for Merton given their current product mix and constraints has been determined, but Merton is similarly considering the addition of a recent Model 103. The values for contribution margin (CM) are given as well as the portion of departmental capacity requisite to produce 103. Based on the capacity information, it was determined that Model 103 would lead 0. 8 hours of Engine Assembly, 1. 5 hours of Metal Stamping, and 1 hour of Model 101 Assembly per truck.Th e constraints and objective function were modified with these new values and run in Excels Solver, which determined that Model 103 should not be produced (Exhibit 5). Exhibit 6 provides a sensitivity stem indicating a lessen cost of -$350, meaning that the CM of Model 103 would need to increase by $350 onward it would make sense for Merton to begin producing Model 103. Capacity Options Given the capacity limitations seen then far, it is a fair conclusion that increasing capacity may present an opportunity.In the optimal solution, there are limitations in some(prenominal) Engine Assembly and Metal Stamping. If one or both of these was increased, this could have a strong positive impact on profit. By referring to the sensitivity report for the optimal solution found in Exhibit 7, we see that Engine Assembly and Metal Stamping have spectre prices of $2,000 and $500 respectively, which means that an increase in one unit of capacity would result in the corresponding increase in pro fit. If Merton can rent capacity for less than the shadow price for either department, it should.Note that for each, this is only true for 500 units before the scenario would require reevaluation (see the allowable increase in Exhibit 7). Also, only one variable or department can be increased. If both are modified, the shadow prices may no longer hold true. Merton also has the selection of increasing engine capacity by 2,000 hours using overtime. This would also result in a 50% increase in direct labor or Model 101$4,000 current from Table B x 1. 5 = $6,000 (reducing CM by $2,000) Model 102$4,500 current from Table B x 1. 5 = $6,750 (reducing CM by $2,250) In the overtime tab (Exhibit 8), we add two additional variables epresentative of overtime toil o1 and o2, including an additional constraint representing the maximum of 2000 hours. As seen in Exhibit 8, Solver has determined that overtime should be utilized to produce 250 additional units of Model 102. However, fixed OH has not been included in the calculations until afterwards as it does not impact the optimal solution, only the solve profit. In this case however, the fixed overhead increases by $0. 75M to $9. 35M if overtime is utilized. Therefore, the $9. 35M is subtracted from this result and compared to our previous optimal solution net profit of $2. M. This was done in Exhibit 8, resulting in a net profit of less than $2. 4M. Therefore, Merton should not assemble engines on overtime under these conditions. Other Factors, Alternatives and Considerations Mertons president would like to impose a market mix constraint requiring Merton to produce at least three time as many units of Model 101 as units of Model 102. By adding this constraint to the analysis in Exhibit 9, the marketing mix moves to producing 2,250 units of Model 101 and 750 units Model 102, and a net profit of $1. M . The marketing constraint hinders the potential occur net profit by $500,000 because at optimal production levels, Merto n will be able to produce a tot net profit of $2. 4M. There are several other options that Merton did not consider. contract capacity from an outside supplier was one alternative, but a similar option would be to simply outsource (at a rate less than the shadow prices discussed earlier). It is also mentioned that at present, demand is great tolerable that the company is selling everything it produces.How much greater than supply is the demand? If it is much greater, Merton should consider raising its prices to reduce demand. If demand is expect to continue, Merton should also evaluate the ROI of investing in capital and permanently increasing capacity as an alternative to renting or outsourcing capacity. Merton should also consider the impact that learnedness curves and technology may have on their production process. As the Model 101 and 102 life cycle continues, the company should see a reduction in time and costs associated ith every aspect of the truck manufacturing process as a result of learning curves. It can be moderately estimated that labor hours per vehicle will be reduced due to learning curves (which result from staff experience and familiarity with the production process), and that Merton will therefore be able to increase the total volume of vehicles produced. Technology could also play an important role in reducing the time and costs requisite to produce the vehicles, so it is important that Merton keep a watchful eye on new production methods and machinery.Investments in technologies can reduce the firms fixed overhead costs and increase profits and improve productivity. In addition, technologies can help reduce the costs of designing, developing, and manufacturing a product which can help the firm to improve product feeling and to charge a higher price. shoemakers last Mertons president was absolutely adjust in his supposition that the company could improve its financial performance by changing their product mix, though wrong in his initial thoughts on which actions to take.The value of linear programming techniques in evaluating possible solutions is clear, specially in that it quickly provides clues of other options to consider (such as adding additional Engine Assembly Capacity). Based on the information provided here, save recommendations for Merton would be to (1) immediately change the production mix to 2000 Model 101s and 1000 Model 102s, (2) evaluate anticipated demand and the impact of a capital investment to increase capacity, and (3) seek quotes for capacity rental or outsourcing Engine Assembly.