What are the limits/constraints affecting the decision?How should Merton determine if the solution is optimal?

Merton Truck Co.
Case Analysis Guidelines HBS 9-189-163
Overview
Merton Truck Company manufactures two models of trucks in four manufacturing departments.
The company is currently producing 1,000 Model 101 trucks and 1,500 Model 102 trucks. With this production schedule the engine assembly department and the Model 102 assembly department are running at full capacity.
The company sells the Model 101 and Model 102 trucks for $39,000 and $38,000, respectively.
Based on the company’s standard production costs (given in Table B) it cost Merton $40,205 to produce Model 101 trucks and $35,930 to produce Model 102 trucks. Thus, it seems clear that Merton is losing money by producing Model 101.
However, as the controller noted during the meeting with the sales and production managers, this overstates the production cost per unit because it includes the fixed overhead. A better approach would be to use only the variable overhead cost per unit (given in Table C) in determining the profit contribution from each model .
Then as long as the total contribution is more than the $8.6 million fixed overhead cost the
production schedule should be profitable.
Objectives
The goal of this case study is to formulate an optimization model using LINGO to analyze
Merton’s production options. Begin by following the structured modeling process:
• Frame the problem
– What decision(s) does Merton need to make?
– What are the decision variables?
– What are the limits/constraints affecting the decision?
– How should Merton determine if the solution is optimal?
– What alternatives need to be considered?

Last Completed Projects