Merton truck Company
Merton truck company deals in two models and recently, its president showed dissatisfaction towards the company’s financial.While meeting with the company’s production, sales and controller managers, he told them that the firm is operating at a good capacity in some of their plants but despite that, their financial position is not so good, they are focusing on developing some strategies to improve its financial position.
The president suggested that they should change their product mix to increase their profits. Financial results show that Model 101 truck has a lower contribution margin than Model 102 truck. Maybe they can acquire machines from outside suppliers and release the capacity problems in its engine assembly department to the truck model 102.
Problem Statement
The company was unable to find the best product mix for Model 102 and Model 101, the point where they can maximize their profits while keeping optimal capacity utilization for the four manufacturing departments includingengine assembly, metal stamping,Model 102 assembly, and Model 101 assembly.
Analysis
First, we have found the contribution margin on both the models. Contribution margin on Model 101 is 3000 and contribution margin on Model 102 is 5000, therefore Model 102 is more profitable than Model 101. It can be ascertained in Exhibit 1 of the case study.
Merton Truck Company Harvard Case Solution & Analysis
Q.1: (a)
Product Mix
The best product mix for both the products would be 2000 trucks of Model 101 and 1000 trucks of Model 102. Results show that when we are producing 2000 units of Model 101 and 1000 units of Model 102 then we are having a maximum total contribution margin of 11 million.
| Contribution Margin | 3,000 | 5,000 | ||
| Number of Units | 2,000 | 1,000 | ||
| Contribution margin | 6,000,000 | 5,000,000 | 11,000,000 | |
| Maximum Capacity | ||||
| Engine assembly | 1 | 2 | 4,000 | 4,000 |
| Metal stamping | 2 | 2 | 6,000 | 6,000 |
| Model 101 assembly | 2 | - | 4,000 | 5,000 |
| Model 102 assembly | - | 3 | 3,000 | 4,500 |
Q.1: (b)
Engine Capacity raised on One Unit
Raising the engine assembly capacity by one unit would increase the overall contribution margin.While increasing the machine hours from 4000 to 4001, the contribution margin has increased by 2000. Hence, we conclude that addingone unit will increase the contribution margin to 2000.
| Contribution Margin | 3000 | 5000 | ||
| Number of Units | 1999 | 1001 | ||
| Contribution margin | 5997000 | 5005000 | 11002000 | |
| Maximum Capacity | ||||
| Engine assembly | 1 | 2 | 4001 | 4001 |
| Metal stamping | 2 | 2 | 6000 | 6000 |
| Model 101 assembly | 2 | 0 | 3000 | 5000 |
| Model 102 assembly | 0 | 3 | 4500 | 4500 |
Q.1: (c)
Capacity increased to 4100 machine hours
Engine assembly machine hours increased from 4000 to 4100 hours, hence, the margin increased to 11.2 million that is 0.2 million more than when machine hours were 4000. However, in the above table, we saw that by adding one unit, the contribution margin has increased by 2000, hence, in this table, the increase in machine hours is 100 times above the previous reading.
| Contribution Margin | 3,000 | 5,000 | ||
| Number of Units | 1,900 | 1,100 | ||
| Contribution margin | 5,700,000 | 5,500,000 | 11,200,000 | |
| Maximum Capacity | ||||
| Engine assembly | 1 | 2 | 4,100 | 4,100 |
| Metal stamping | 2 | 2 | 6,000 | 6,000 |
| Model 101 assembly | 2 | - | 3,800 | 5,000 |
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