MERTON TRUCK COMPANY

1 (a) To calculate the contribution for each truck,

Contribution = selling price – (direct material costs + direct labour + variable overhead)
Model 101 Model 102
Selling price 39,000 38,000
Direct material cost 24,000 20,000
Direct labour cost 4,000 4,500
Variable overhead cost 8,000 8,500
Contribution 3,000 5,000

Number of Model 101 truck manufactured = x1

Number of Model 102 truck manufactured = x2
Maximize -> 3000 x1 + 5000 x1
Subject to constraints 1 x1 + 2 x1 < 4000 (Engine assembly)
2 x1 + 2 x2 < 6000 (Metal stamping)
2 x1 < 5000 (Model 101 assembly)
3 x2 < 3000 (Model 102 assembly)
x1 > 0
x2 > 0

Optimal product mix -> Model 101: 2000 trucks; Model 102: 1000 trucks
Max. objective function: $1,10,00,000
1 (b) When the engine assembly capacity is increased to 4001 machine hours, the extra unit
capacity will be the dual price of engine assembly constraint
Optimal product mix -> Model 101: 1999 trucks; Model 102: 1001 trucks
Max. objective function: $1,10,02,000; Extra unit capacity: $2,000
1 (c) When the engine assembly capacity is increased to 4100 machine hours,
Optimal product mix -> Model 101: 1900 trucks; Model 102: 1100 trucks
Max. objective function: $1,02,00,000; Extra unit capacity: $2,00,000
Extra unit capacity = 200000 = 2000 x 100 = (dual price) x (extra units)
Hence verified
1(d) Max allowable value of engine assembly constraint is 4500. Considering this as the new
RHS for the engine assembly constraint,
Optimal product mix -> Model 101: 1500 trucks; Model 102: 1500 trucks
Max. objective function: $1,20,00,000
500 units of engine assembly capacity can be added before there is a change in the additional
unit of capacity
Solution 2:

As it is seen in Q1 (b) and Q1 (d), an increase in one unit of capacity increase the contribution
by $2000. Therefore, company should opt for this alternative as it increases its contribution. This
implies company is willing to pay $2000 and it should rent 500 hours until it is increasing its
contribution.

Solution 3:

Number of Model 103 trucks manufactured = x3

Algebraic Formulation:

Maximise 3000x1 + 5000x2 + 2000x3

Subject to constraints X1 + 2x2 + 0.8x3 ≤ 4000

2x1 + 2x2 + 1.5x3 ≤ 6000
2x1 + x3 ≤ 500
3x2 ≤ 4500

a) Merton Should not produce Model 103 trucks as it is clearly seen from the analysis that
producing Model 3 will not yield in an optimum solution.

b) The contribution to the Model 103 truck should be greater than the maximum coefficient i.e.
2350 before it became the worthwhile produce.
Solution 4:
We have decrement in contributions for 101 by 600 ( Engine assembly cost is now 1800 and
earlier was 1200) -> so new contribution is 2400 instead of 3000 and similar for model 102, by
1200-> so new contribution is 3800 instead of 5000
z=profit maximization= max(3000x1+5000x2+24000x3+3800x4)
Where x1=Model 101
x2=Model 102
x3= Model 101 under Overtime
x4=model 102 under Overtime manufactured
St constraints:
x1+2x2<=4000
2x1+2x2+2x3+2x4<=6000
2x1+2x3<=5000
3x2+3x4<=4500 And x3+2x4<=2000

We observe 1500 each 101 and 102 will be produced for this case in optimized situation
We also compare with 1.a product mix and current one yields lesser profit when compared to it
Sensitivity:

Solution 5:

So adding a new constraint x1-3x2 >= 0 and using TORA we get,

So the optimal solution now is

Model 101: 2250 units

Model 102: 750 units