Merton Truck Case

Memorandum

To: Richard Merton, President, Merton Truck Company

Date: April 30, 2013

RE: Merton Truck Company Financial Performance and Product Mix Concerns

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The purpose of this memo is to analyze the production capacity of Merton Truck Company and determine the monthly optimal production mix which results in maximum contribution margin per month. The memo also addresses the company’s opportunity to rent engine capacity from outside supplier and recommend maximum rent the company should pay along with the maximum hours of capacity that can be rented in a given month. We also understand that, to get more profit in the long term, you have decided to produce at least 3 Model 101 trucks for every Model 102 truck produced. The memo will also give the resulting long-run optimal monthly product mix.

Decision variables in the case are the number of Model 101 trucks and number of Model 102 trucks that can be produced limited by the machinery constraints. Constraints are the number of machine-hours available for Engine Assembly, Metal Assembly, Model 101 Assembly and Model 102 Assembly. The contribution margin is the difference between revenue generated and the variable costs. Revenue and variable costs vary with the production mix and so does the Contribution Margin.

Revenue & Costs:

Revenue: Revenue is generated from selling Model 101 truck for $39,000 and Model 102 Truck for $38,000.

Variable Costs: From tables A and B, Production Cost is the sum of Direct Materials, Direct Labor and Overheads. Overhead is further divided to be fixed and variable. The direct materials, direct labor and variable overhead costs change based on the number of trucks manufactured. On the other hand, the total fixed overhead per month does not change based on the number of trucks produced which means that the fixed costs will not impact the production mix. Disregarding fixed costs will solve of problem of absorbing the...