QT Assignment -1

Merton Truck Company

Costs:Specification
DM

Model 101
24000

Model 102
20000
Direct Labor

Engine Assembly
Metal Stamping
Final Assembly
Total DL

1200
800
2000
4000

2400
600
1500
4500
Variable Overhead

Engine Assembly
Metal Stamping
Final Assembly
Total Variable Overhead
Selling Prices
Total Variable Cost
Contribution Margin Per
Unit

2100
2400
3500
8000
39000
36000
3000

4000
2000
2500
8500
38000
33000
5000

Fixed Overhead
Engine Assembly
Metal Stamping
Final Assembly
Total Fixed Overhead

1700000
2700000
2700000
8600000

1500000
Constraints

Engine
Assembly
Metal
Stamping
Model 101
Model 102
Non-negative
Model 101
Non-negative
Model 102

1*Model 101

2*Model 102

<=

4000

2*Model 101

2*Model 102

<=

6000

2*Model 101
0*Model 101
1*Model 101

0*Model 102
3*Model 102
0*Model 102

<=
<=
>=

5000
4500
0

0*Model 101

1*Model 102

>=

Maximize profit = UCM Model 101 * units Model 101 + UCM Model 102 *
units Model 102 Fixed Overheads
Question 1:
(a) Find the best product mix for Merton.
Solution
Variables:
Model 101
2000

Model 102
1000

Objective
2400000

(b)Best product mix if engine assembly capacity were raised by

one unit from 4000 to 4001 machine- hours :
Shadow price of Engine Assembly is $2000.
So, if Assembly Unit Cost is increased from 4000 to 4001, then extra unit
engine assembly capacity is worth 2000$.
Variables:
Model 101
1999

Model 102
1001

Objective
2402000

(c) If capacity of engine assembly is increased to 4100, increase in

profit due to 100 unit increase in Production Capacity :
= 2600000- 2400000
= 200000
Variables:
Model 101
1900

Model 102
1100

Objective
2600000

(d)500 units of engine assembly capacity can be added before its

capacity worth changes.
Profit at 4500 and 4501 is same, i.e. production decision does not
change.
Objective
3400000
Variables
Model 101
Model 102
1500
1500
Question 2: We can have maximum 500 hr. increase in capacity and Profit
contribution increases 2000 $ per hr.
So, maximum we can pay that much.
Variables:
Model 101
1500

Model 102
1500

Objective
3400000

Question 3:
Constraints
Engine Assembly
Metal Stamping
Model 101
assembly
Model 102
assembly
Non- Negative
Model 101
Non- Negative
Model 102
Non- Negative
Model 103

1 2
2 2
2 0

0.8
1.5
1

4000
6000
4000

<=
<=
<=

4000
6000
5000

0 3

3000

<=

4500

1 0

2000

>=

0 1

1000

>=

0 0

>=

Profit = UCM Model 101 * units Model 101 + UCM Model 102 *
units Model 102 + UCM Model 103 * units Model 103 Fixed
Overheads

3(a) We should not produce Model 103.

Variables
Model
101
2000

Model 102

Model 103

Objective

1000

2400000

3(b)-

Name
Model 101
Model 102
Model 103
Name
Engine
Assembly
Metal
Stamping
Model 101
Assembly
Model 102
Assembly
Nonnegative
Model 101
Nonnegative
Model 102
Non
negative
Model 103

Final
Value
2000
1000
0
Final
Value
4000

Reduced
Cost
0
0
0
Shadow
Price
2000

Objective
Coefficient
3000
5000
2000
Constraint
R.H. Side
4000

Allowable
Increase
2000
1000
350
Available
Increase
500

Allowable
Decrease
500
2000
1E+30
Available
Decrease
500

6000

500

6000

500

1000

4000

5000

1E+30

1000

3000

4500

1E+30

1500

2000

2000

1E+30

1000

1000

1E+30

-350

2857.14285
7

Model 103 CM should be more than 2350 in order to make it worthy of

production. With 2351 CM for Model 103, we get the following production
schedule.
Model 101
0

Model 102
857.14286

Model 103
2857.1429

Objective
2402857

Question 4
Clearly from sensitivity analysis 500 units of Engine assembly capacity
can be added. More than it will make no improvement.

Model 101
2000

Model 102
1000

Objective
2400000

Constraints:
Engine
Assembly
Metal
Stamping
Model 101
Model 102
Nonnegative
Model 101
Nonnegative
Model 102

4500

<=

6000

6000

<=

6000

2
0
1

0
3
0

3000
4500
1500

<=
<=
>=

5000
4500
0

1500

>=

So, additional Revenue = -50000 $

Model 101
1500

Model 102
1500

New Contribution
Increase in Fixed
Increase in Labor
Labor Cost Saving
Net Contribution

Objective
3400000
3400000
750000
900000
600000
2350000

250*3600$
500*1200$

Question 5
We have to add new constraint of product mix.
Constraints:
Engine
Assembly
Metal Stamping
Model 101
assembly
Model 102
assembly
Non- negative
Model 102
Non- negative
Model 101
Product Ratio
Constraint

<=

4000

2
2

2
0

<=
<=

6000
5000

<=

4500

>=

>=

-1

Additional Contribution due to this decision is = 2400000 $ - 1900000 $

= 500000 $
Model 101
2250

Submitted by:Bolla Monika Rao

2015PGP017

Model 102
750

Objective
1900000