Merton Truck Company - Case Analysis

Group 9, Section B, IIM Indore

Ayushi, Fareen, Manvendra, Pritam, Priyanshi, Pulakrit, Rohan, Samiksha

Q. 1 Find the best product mix for Merton.

Solution: We will first calculate total costs of truck model 101 and 102 (these are per unit cost):-

Truck Model Model 101 Model 102

Direct material costs $24000 $20000
Direct labour $4000 $4500
Variable overhead/unit $8000 $8500
Total Cost (per unit) $36000 $33000

Selling price for model 101: $39000

Selling for model 102: $38000

Profit per unit on Model 101= $39000-$36000=$3000

Profit per unit on Model 101= $38000-$33000=$5000

Total fixed overhead per month=$ 8.6 million= $8600000

We have to decide production of model 101 and 102 in such a way that our profits are maximized.
We will formulate a liner programming model considering all the capacity /production constraints.

Let no. of trucks produced for model 101 and 102 is “a” and “b” respectively to maximize profits,
which we be a function of ‘a’ and ‘b’.

Profit 𝝅= 3000*a + 5000*b – 8600000

For objective function, we will not consider fixed cost of $8.6 million in our objective function. For
final output, we will subtract that figure from optimized value of objective function.

Objective Function: Maximize Z= 3000*a + 5000*b

Subject to: 1*a + 2*b ≤ 4000 (Engine Assembly capacity)

2*a + 2*b ≤ 6000 (Metal Stamping capacity)

2*a + 0*b ≤ 5000 (Modal 101 assembly capacity)

0*a + 3*b ≤ 4500 (Modal 102 Assembly capacity)

1*a + 0*b ≥ 0 (Non-negativity constraint)

0*a + 1*b ≥ 0 (Non-negativity constraint)

We will solve this equation with help of software. We will also calculate slack/surplus, dual prices
etc. numerically.
Software Solution:

Graphical Solution:
Optimal Solution is: a= 2000, b= 1000

Value of Objective function= 2000*3000 + 1000*5000= $11000000

Profit earned= $11000000 - $86000000 = $2400000

Optimal solution lies on the intersection point of constraint 1 and 2 i.e. engine assembly and metal
stamping capacity.

Sensitivity Analysis:

(i) Changes in the objective function coefficient:

The solution will remain optimal as long as the slope of objective function Z lies
between the slopes of lines which are intersecting to provide optimal solution, which
are constraint 1 and 2 in our case? Hence-
Let profits per unit are c1 and c2 from truck model 101 and 102 respectively. We will
find the range of c1 and c2 for which our previously found solution remains optimum.
𝟏 𝒄𝟏 𝟏
≤ ≤
𝟐 𝒄𝟐 𝟏
To find range of c1, we keep c2 constant at 5000 so we find:
2500 ≤ c1 ≤ 5000, so upper limit of c1= 5000, lower limit of c1= 2500
To find range of c2, we keep c1 constant at 3000 so we find:
3000 ≤ c2 ≤ 6000 so upper limit of c2= 6000, lower limit of c2= 3000
This is matching with software solution.
(ii) Changes in the right hand side of constraints: RHS can be thought of representing
limits on resources. We will try to investigate the sensitivity of the optimum solution to
make changes in the amount of resources available.
Feasibility range for constraint 1: Value of RHS such that original solution remain the
intersection of original solution constraints. For constraint 1, the intersection point
moves along the line A (intersection of constraint 2 & 4) and B (intersection of
constraint 2 and 3).
A (1500, 1500); B (2500, 500)
Value of RHS for point E= 1500 + 2*1500= 4500
Value of RHS for pint B = 2500 + 2*500= 3500
So range of RHS for constraint 1= [3500, 4500]
General solution can be calculated by solving constraint 1 and 2 by keeping M1 in RHS
of constraint 1.
a= 6000- M1
b= M1- 3000 where M1 ϵ [3500, 4500]
Feasibility range for constraint 2: Value of RHS such that original solution remain the
intersection of original solution constraints. For constraint 2, the intersection point
moves along the line C (intersection of constraint 1 & 4) and D (intersection of
constraint 1 and 3).
C (1000, 1500); D (2500, 750)
Value of RHS for point C= 2*1000 + 2*1500= 5000
 Value of RHS for pint D = 2*2500 + 2*750= 6500
So range of RHS for constraint 1= [5000, 6500)
General solution can be calculated by solving constraint 1 and 2 by keeping M2 in RHS
of constraint 2.
a= M1 - 4000
b= 4000 – M2/2 where M2 ϵ [5000, 6500]

Unit worth of resource:

Change in value of Z correspond ing to the feasible range of resource i

y 
i feasible range of resource i

Change in O.F. from A to B

Thus y 
1 Change in M1 from A to B
(3000 *1500  5000 *1500)  (3000 * 2500  5000 * 500)
  2000
(4500  3500)
Similarly y2 = 500
Constraint 3 and 4 are not playing any direct role in deciding optimal solution. Hence minimum
value of RHS can be calculated by putting optimal solution is the constraint and maximum possible
value will be infinite. Hence
Constraint 3 min RHS value= 2*a + 0*b = 2*2000 = 4000, max value = infinite
Constraint 3 min RHS value= 0*a + 3*b = 3*1000 = 3000, max value = infinite

1 (b) Best product mix if engine assembly capacity were raised by one unit, from 4000 to 4000
machine hours?
Solution: Dual price of constraint 1 is 2000, that means a unit worth of resource will change value
of objective function by $2000. Hence extra unit of capacity is worth $2000. This can be verified by
solving constraint 1 and 2-

1*a + 2*b ≤ 4001 (extra one unit of Engine Assembly capacity)

2*a + 2*b ≤ 6000 (Metal Stamping capacity)

Intersection point will be optimal solution, i.e. (1999, 1001)

Objective function value= 1999*3000 + 1001*5000= $11002000
Clearly one unit of increased engine capacity gives $11002000- $11000000 = $2000 worth of more
profit.1

1(C) If engine capacity is increased to 4100 machine hours then new increase in contribution will
be 100 times of that is part(b)
Ans.: As unit worth of engine capacity resource (dual price) worth $2000 and range for dual price
to be valid is M1 ϵ [3500, 4500]. New capacity 4100 lies in the feasibility range of constraint 1.
Hence increasing RHS by 100 will increase profit by 100*2000= $200000. This can be verified by
solving linear program with new set of constraints.
Objective Function: Maximize Z= 3000*a + 5000*b

Subject to: 1*a + 2*b ≤ 4100 (New Engine Assembly capacity)

2*a + 2*b ≤ 6000 (Metal Stamping capacity)

2*a + 0*b ≤ 5000 (Modal 101 assembly capacity)

0*a + 3*b ≤ 4500 (Modal 102 Assembly capacity)

1*a + 0*b ≥ 0 (Non-negativity constraint)

0*a + 1*b ≥ 0 (Non-negativity constraint)

Solving with help of Tora.: This is clear by the new objective function value that it has increased by
$200000 as predicted by our previous model.

1 (D) How many units of engine assembly capacity can be added before there is any change in the
additional unit of capacity?

Solution: We have calculated feasibility range for constraint 1 in previous part. This range basically
denotes that value of range of RHS such that original solution remains the intersection of original
solution constraints i.e. Dual prices remain valid.
So range of RHS for constraint 1= [3500, 4500]. Hence maximum capacity addition can be= 4500-
4000= 500 machine hours.

Q.2 Renting engine capacity from outside vendor, calculating maximum payment to vendor and
maximum no. of machine hours it should rent?
Solution: The engine capacity can be increased to 4500, upper range of feasibility zone. So
company can outsource engine assembly facility to a maximum of 500 machine hours with a pay
rate of $2000 per engine assembly machine hour.

Q.3 Introduction of 3rd model 103 truck

Solution: the Company decide to make c units of 103 model truck.
The new objective function and constraints will be-
Objective Function: Maximize Z= 3000*a + 5000*b + 2000*c

Subject to:

1*a + 2*b + (4000/5000)*c ≤ 4000 (Engine Assembly capacity)

2*a + 2*b + (6000/4000)*c ≤ 6000 (Metal Stamping capacity)

2*a + 0*b + 1*c ≤ 5000 (Modal 101 and 103 assembly capacity)

0*a + 3*b + 0*c ≤ 4500 (Modal 102 Assembly capacity)

1*a + 0*b + 0*c ≥ 0 (Non-negativity constraint)

0*a + 1*b + 0*c ≥ 0 (Non-negativity constraint)

0*a + 0*b + 1*c ≥ 0 (Non-negativity constraint)

3(a) Should Merton produce 103 model trucks?

Solution: We will solve above liner programming problem with help of software.

From the model output it is clear that to maximize profits, there should not be any production of
type 103 trucks.

3(b) how high would the contribution of each model 103 truck have to be before it became
worthwhile to produce the new model?

Solution: From sensitivity analysis of “Changing the objective function coefficient” we see that
when the contribution is between the range of (-∞, 2350), the objective function does not change.
Hence we should increase the contribution of model 103 more than 2350 to make it worthwhile to
produce the model.
Q.4 overtime production in engine assembly with additional capacity of 2000 machine hours, in
which we will have 50% more labour costs for over time, increased overhead by 0.75mn, shall
Merton go ahead with overtime production?

Let “c” and “d” be no of truck model 101 and 102 which are made in overtime production.

Truck Model Model Model Model 102 Model

101(regular) 101(overtime) (regular) 102(overtime)
Direct material costs $24000 $24000 $20000 $20000
Direct labour $4000 $4600 $4500 $5700
Variable overhead/unit $8000 $8000 $8500 $8500
Total Cost (per unit) $36000 $36600 $33000 $34200
Selling price per unit $39000 $39000 $38000 $38000
Net profit (per unit) $3000 $2400 $5000 $3800
Objective Function: Maximize Z= 3000*a + 5000*b + 2400*c + 3800*d

Subject to:

1*a + 2*b ≤ 4000 (Engine Assembly regular capacity)

1*c + 2*d ≤ 2000 (Engine Assembly overtime capacity)

2*a + 2*b + 2*c + 2*d ≤ 6000 (Metal Stamping capacity)

2*a + 2*c ≤ 5000 (Modal 101 assembly capacity)

3*b + 3*d ≤ 4500 (Modal 102 Assembly capacity)

a, b, c, d ≥ 0 (Non-negativity constraint)

We will solve this liner programming model with help of software.

From the graphical solution (below image) we can notice that overtime has increased output by
$700000. However as given in question, there is an increase in monthly fixed overhead by
$0.75mn which is more than the increased output of$0.7mn hence overtime is not recommended.
Q. 5 maximize production of 101 models with condition of 101 number being at least three times
of 102 production number.

Solution: Objective Function: Maximize Z= 3000*a + 5000*b

Subject to: 1*a + 2*b ≤ 4000 (Engine Assembly capacity)

2*a + 2*b ≤ 6000 (Metal Stamping capacity)

2*a + 0*b ≤ 5000 (Modal 101 assembly capacity)

0*a + 3*b ≤ 4500 (Modal 102 Assembly capacity)

1*a - 3*b ≥ 0

1*a + 0*b ≥ 0 (Non-negativity constraint)

0*a + 1*b ≥ 0 (Non-negativity constraint)

It is clear from above analytical solution that President’s idea resulting into lower profits. Overall
profit level is reducing by $1100000 - $1050000 = $50000 hence his idea of pushing sales of 101
model more is not worth it.