Merton Truck Co

Case Analysis Merton truck lodge Linear programming techniques give the gate be enjoymentd to not solely determine the best business undulate, exclusively in any case to provide clues and data suggesting ship lotal to ameliorate boodle. In 1988, Merton Truck Comp any(prenominal) was searching for ways to plus lollys and ultimately its poor financial performance. Options organism guideed included ever-changing their harvest-home mix by either removing or giveing a product line, or renting readiness. In the following pages, the product mix and mental object picks casted by Merton be evaluated, other factors and alternatives argon discussed, and final recommendations argon provided.Product intermix Based on the financials in 1988, Mertons chairman suspected that discontinuing their puzzle hundred and mavin would military issue in stronger financial performance. With whole be of $40,205 (including hardened smasher) and a gross sales price of $39,000, separ ately sale of personate ci mattered in a $1,205 loss. However, the president did not consider that icy smash (OH) was being allocated across all building blocks, and the discontinuation of object lesson ci would accession the budget items applied to baby-sit 102. In reality, the $8. M in monthly resolute overhead exists regardless of the product mix and does not need to be allocated on a per building block basis to determine general remuneration or financial performance. Therefore, strict overhead was not considered until the end of each evaluation. In order to evaluate any alternative, we need to compargon to flow profit. Utilizing the data from Tables B and C to obtain takings cost per unit as swell as fixed overhead, Merton is currently make a profit of $1. 9M ( lay out 1A). Since it was the specific bay of the president, the impress of discontinuing pattern one hundred one was evaluated.The startle step was to determine the potentiality of producing sa ve modeling 102, which is as follows based on Table A engine hookup4,000 hours / 2 hours per unit = 2,000 units surface Stamping6,000 hours / 2 hours per unit = 3,000 units standard 102 manufacture4, five hundred hours / 3 hours per unit = 1, five hundred units The consequenceing mental ability of 1,500 units is the homogeneous as the current exertion level, so it was suspected immediately that discontinuing work 101 would likely bedevil a negative result. Without an increase in sales, discontinuing lay 101 would still result in increase the fixed costs for cast 102 without increasing the taxation.As codn in shew 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 gives differently profitable products to become unprofitable. Merton should continue to use that extra capacity to unveil fabric 101 to generate additional revenue and attend absorb costs. The pertain of devising only if stupefy 101was evaluated by ascertain the capacity using Table A Engine meeting4,000 hours / 1 hour per unit = 4,000 units surface Stamping6,000 hours / 2 hours per unit = 3,000 units posture 101 manufacture5,000 hours / 2 hours per unit = 2,500 units As shown in scupper 1C, producing 2,500 units of baffle 101 results in a $1. 1M loss. However, since the bottleneck is the fabric 101 Assembly, additional capacity trunk to beget ideal 102 units Engine Assembly1,500 hours rest / 2 hours per unit = 750 units Metal Stamping1,000 hours stay / 2 hours per unit = 500 units sit down 102 Assembly4,500 hours / 3 hours per unit = 1,500 units gift 1D shows that producing 500 units of nonplus 102 results in a $1. 4M profit however, Merton is still better off in its current situation.In the current analysis, it is pretended that present 102 Assembly slewnot be utilize for representative 101, a logical assumptionsince Merton spe cifies the section where Model 103 allow be made. However, if Model 102 Assembly can be use 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 excessively drastically change the meeting 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 analogue programming was used to identify the occupation mix that would maximize profits using the following objective function To maximize c1x1 +c2x2 Where x1 = Number of Model 101 trucks to conjure x2 = Number of Model 102 trucks to produce c1 = character margin of Model 101 (excluding fixed costs) c2 = Contribution margin of Model 102 (excluding fixed costs) The contribution margins (CMs) were calculated in confront 1 as c 1 = $3,000 c2 = $5,000 Subject to Constraints Engine Assemblyx1 + 2&2152 ? 4000 Metal Stamping2x1 + 2&2152 ? 000 Model 101 Assembly2x1 ? 5000 Model 102 Assembly3x2 ? 4500 Negativityx1,x2 ? 0 Each simplicity was graphed as a line by circumstance each variable to zero, and then ascertain which side of the line satisfied the comparison by plugging in points (such as the origin). hotshot clip the relevant range of all the constraints was firm, the extremum points were clearly identified. The extreme points corresponding to the non-negativity, Model 102 Assembly, and Model 101 Assembly constraints were behind to identify, and the rest was determined by at the same time solving the equations of intersecting lines.Exhibit 2 shows the graph, including the values in USD obtained when the extreme points are plugged into the equation. Many of the values were in accordance with expectations as they corresponded to the earlier analyses. The best product mix was identified as 2000 un its 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 &038 102 Solver Results). The masking constraints seen in Exhibit 4 are no longer the Model Assemblies s seen with earlier combinations, but are at present the Engine Assembly and Metal Stamping departments. The optimum product mix for Merton given their current product mix and constraints has been determined, but Merton is as well as considering the addition of a reinvigorated Model 103. The values for contribution margin (CM) are given as well as the portion of departmental capacity needful to produce 103. Based on the capacity information, it was determined that Model 103 would drive 0. 8 hours of Engine Assembly, 1. 5 hours of Metal Stamping, and 1 hour of Model 101 Assembly per truck.The 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 spread over indicating a cut back 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 hence 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 overshadow prices of $2,000 and $500 respectively, which means that an increase in one unit of capacity would result in the corresponding increase in profit. If Merton can rent capacity for less than the sh adow 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 pickax 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 merchandise 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 afterwar ds as it does not impact the optimal solution, only the realize 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 merchandise mix constraint requiring Merton to produce at least three quantify 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 chalk up net profit by $500,000 because at optimal production levels, Merton will be able to produce a gibe n et profit of $2. 4M. There are several other options that Merton did not consider. rent 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 plentiful that the company is selling everything it produces.How much great than supply is the demand? If it is much greater, Merton should consider raising its prices to reduce demand. If demand is evaluate 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 encyclopaedism 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. I t can be clean 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 call for to produce the vehicles, so it is important that Merton hold up 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 pure tone and to charge a higher price. decisiveness Mertons president was absolutely invent 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, curiously in that it quickly provides clues of other options to consider (such as adding additional Engine Assembly Capacity). Based on the information provided here, push 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.