SCHOOL OF MANAGEMENT AND COMMERCE

MASTERS OF COMMERCE

ACCOUNTING FOR MANAGERS ASSIGNMENT:

(CASE ANALYSIS-MERTON TRUCK COMPANY)

PRESENTED BY: Mwakio, Joseph Ngeti -071043

PRESNTED TO: Dr. David Wang’ombe

PRESENTED ON: 14th November 2016

Analysis of Merton Production and Alternative options
We do not consider fixed costs when calculating the contribution of each model since these costs
will be the same regardless the production mix and they are distributed to the two truck models in
proportion to degree of capacity utilization. Therefore the contribution of each model will be as
follows:

Model 101 Model 102

Selling Price $ 39,000.00 $ 38,000.00
Direct Material $ (24,000.00) $ (20,000.00)
Direct labor $ (4,000.00) $ (4,500.00)
Variable Overheads $ (8,000.00) $ (8,500.00)
Contribution $ 3,000.00 $ 5,000.00

We formulate a Linear Programming model to get the perfect mix: Let Model 101 be X1 and Model
X2
Objective; (Maximize profit Z) = 3,000X1+ 5,000X2
Subject to Constraints; X1+2X2 ≤ 4,000 (Engine Assembly)
2X1+2X2 ≤ 6,000 (Metal Stamping)
2X1 ≤ 5,000 (Model 101 Assembling)
3X2 ≤ 4,500 (Model 102 Assembling)
X1, X2 ≥0 (Non negativity)

Output

The best production mix given the constraints would be 2,000 units of model101 truck and 1,000
units of model 102 truck which would lead to a contribution $ 11,000,000.
A unit increase in engine assembly capacity is worth $ 2,000. Model 101 assembly and model 102
assembly have 1,000 and 2,000 unutilized resources respectively. Therefore, to get a better mix,
that adds this value to the contribution, given an increase in a unit of assembly time, we forgo a
unit of model 101 and produce an additional unit of model 102 and hence the net contribution will
be $ (-3,000 + 5,000) =$ 2,000. Hence the best mix would be 1,999 units of model 101 and 1,001
units of model 102 giving a contribution of $ 11,002,000.
If the engine assembly capacity is increased to 4,100 machine hours, the contribution would
increase by $ 2,000 * 100 to $ 11,200,000. This trend will continue until the increase in machine
engine capacity surpass the upper boundary of $ 4,500; therefore the engine assembly can be
increased by 500 before the value changes.
The engine assembly capacity is fully exploited at 4,000 hours. However, it could be expanded to
4,500 hours and therefore it is prudent for the company to purchase additional (to a maximum of)
500 hours at a cost of $ 2,000 per hour. Therefore the rent should not exceed the $ 2,000 per engine
assembly hour.
If model 103 is introduced we would have a different model. The Engine assembly time for each
would be (4000/5000) = 0.8, the metal stamping time would be (6000/4000) = 1.5 and the model
assembling time would be (0.5 * 2) = 1. The algebraic expression would be as follows;(Let model
103 trucks be X3)
Objective; (Maximize profit Z) = 3,000X1 + 5,000X2 + 2,000X3
Subject to Constraints; X1+2X2+ 0.8 X3≤ 4,000 (Engine Assembly)
2X1+2X2+1.5X3 ≤ 6,000 (Metal Stamping)
2X1+ X3≤ 5,000 (Model 101& 103 Assembling)
3X2 ≤ 4,500 (Model 102 Assembling)
X1, X2, X3 ≥0 (Non negativity)
Output
From the model output, truck model 103 should not be produced.
When we introduce the overtime, for the 2,000 hours engine assembly, the direct labor cost for
Model 101 and Model 102 will increase by $ 600 and $ 1,200 respectively. Therefore the
contributions will decrease to $ 2,400 and $ 3,800 respectively. For the sake of algebraic
expression we denote the units Model 101 produced during the overtime as X3 and X4. The model
will be as follows;
Objective; (Maximize profit Z) = 3,000X1 + 5,000X2 + 2,400X3+3,800X4
Subject to Constraints; X1+2X2≤ 4,000 (Engine Assembly)
X3+2X4≤ 2,000 (Engine Assembly Overtime)
2X1+2X2+2X3+2X4 ≤ 6,000 (Metal Stamping)
2X1 + 2X3≤ 5,000 (Model 101Assembling)
3X2+3X4 ≤ 4,500 (Model 102 Assembling)
X1, X2, X3,X4 ≥0 (Non negativity)
Output

The optimal solution, given the constraints, gives a contribution of $ 11,700,000 with 1500 model
101 trucks and 1250 model 102 produced in regular time and 250 model 102s produced in over
time (No production of model 101 in overtime). This is an increase in contribution by $ 700,000,
which is relatively good. However, adoption of this would lead to an increase in fixed overheads
by $ 750,000 which is greater than the marginal increase in contribution, and hence overtime
operations in engine assembly should not be adopted.
Management proposal to produce 101 Models at least 3 times the number of Model 102. Therefore
we have a new constraint of X1 ≥ 3X2 which transforms to X1-3X2 ≤ 0. The model will be;
Objective; (Maximize profit Z) = 3,000X1+ 5,000X2
Subject to Constraints; X1+2X2 ≤ 4,000 (Engine Assembly)
2X1+2X2 ≤ 6,000 (Metal Stamping)
2X1 ≤ 5,000 (Model 101 Assembling)
3X2 ≤ 4,500 (Model 102 Assembling)
X1-3X2 ≤ 0 (At least 3 times)
X1 X2 ≥0 (Non negativity)
Output

The output yields a contribution of $ 10,500,000 with 2,250 units of Model 101 and 750 units of
Model 102 which is lower than the initial contribution of $ 11,000,000 and therefore it is not a
worthy idea.