Merton Truck Company Case

Memorandum

To: Mr. Richard Merton, President, Merton Truck Company

Re: Merton Truck Company Financial Performance and Product Mix Concerns

Introduction

The purpose of this memo is to determine the role that the product mix plays in the company’s financial performance. The optimal product mix of Model 101 and Model 102 trucks will be the one that maximizes contribution margin, thus maximizing profit for the company. This analysis will also provide recommendations regarding the effective use of capacity in the engine assembly department. This memo will also explain the consequences of imposing the additional product mix constraint of producing three times as many Model 101 trucks as Model 102 trucks.

Current Situation

After reviewing the financial reports for the second half of 2012, there are concerns with the current financial performance of the company. Cougar Consulting will identify the optimal product mix of Model 101 and Model 102 trucks that will maximize total contribution for the company. Based upon this calculated optimal product mix, recommendations will be provided regarding the possibilities of “renting” additional capacity in the engine assembly department and imposing a three to one product mix constraint.

Data for Analysis

The data used for this analysis of product mix concerns is supplied by Merton Truck Company. Merton Truck Company has provided the following data:

* The company currently produces two models of trucks, Model 101 with a selling price of $39,000, and Model 102 with a selling price of $38,000.

* During the previous six months, Merton Truck Company had a monthly output of 1,000 Model 101 trucks and 1,500 Model 102 trucks.

* The variable costs per unit and the fixed overhead costs were supplied and are shown in Tables 1 and 3 in the Appendix attached to the memo.

* The calculated contribution margin shown in Table 2 in the attached Appendix, which is selling price minus variable costs, is...