Production Possibilities and Standard Costs ‘The Merton Truck Company manufactured two specialized models of trucks, Model 101 and Model 102, in a single plant in Wheeling, Michigan. Manufacturing operations were grouped into four departments: engine assembly, metal stamping, Model 101 assembly, and Mode! 102 assembly. Capacity in each department was expressed in manufacturing machine-hours available (net of maintenance downtime). Machine-hours available, in conjunction with machine-hours required for ‘each truck model in each department, determined Merton's "production possibilities.” For example, the company’s engine assembly capacity was sufficient to assemble engines for either 4,000 Model 101 trucks per month (4,00) machine-hours available = 1 machine-hour required per truck) or 2,000 ‘Mode! 102 trucks per month (4,000 machine-hours available + 2 machine-hours per truck), if devoted fally to either model. Of course, Merton could also assemble engines for both models: for example, if 41,000 Model 101 trucks were produced, sufficient engine assembly capacity was availeble for 1,500 Model 102 tracks ({4,000 - 1,000 * 1.0] / 20). Data on the machine-hour requirements for each truck ‘model in each department and the monthly machine-hour availability in the departments are given in Table A. The company could sell as many trucks as it could produce. ‘Merton’s production schedule for the first six months of 1988 had resulted in a monthly output of 1,000 Model 101 trucks and 1,500 Model 102 trucks. At this level of production, Model 102 assembly and engine assembly were operating at capacity. However, metal stamping and Model 101 assembly were operating at only 83.3% and 40% of capacity, respectively. Table B gives standard costs at this level of production; Table C gives details on overhead costs Meeting of the Controller, Sales Manager, and Production Manager "Lhave been studying the figures for standard costs for the two truck models,” the sales manager began. "Why dont we just stop making Model 101 trucks? As I see it, we are losing $1,205 for each ‘Model 101 truck we sell.” (A Model 101 truck sold for $39,000, a Mode! 102 truck for $38,000.) ‘The controller objected. “The real problem is that we are trying to absorb the entire fixed overhead of Model 101 assembly over only 1,000 trucks. We would be better off increasing production of Model 101 trucks, cutting back if necessary on Mode! 102 production, ‘The production manager entered the discussion. “There is a way to increase Model 101 production without cutting back on Model 102 production,” he said. "We can relieve the capacity problem in engine assembly by purchasing Model 101 or Model 102 engines from an outside supplier. If we pursue this alternative, I suggest we furnish the necessary materials and engine components, and reimburse the supplier for labor and overhead. 1. (@) Find the best product mix for Merton. (©) What would be the best product mix if engine assembly capacity were raised by ‘one unit, from 4,000 to 4,001 machine-hours? What is the extra unit of capacity worth? (©) Assume that a second additional unit of engine assembly capacity is worth the same as the first. Verify that if the capacity were increased to 4,100 machine- hours, then the increase in contribution would be 100 times that in part (b. (a) How many units of engine assembly capacity can be added before there is a change in the value ofan additional unit of capacity? A a 8 ¢ D E F 6 "Merton Truck Problem 1 “Info from the Case Model 101__Model 102 10 LHS Equation (= HS Limit 15 16 Answer questions 1(a-d) below: 7 18 19 Show transcribed data Objective (Maximize Contribution)Solution.. (a) Find the best product mix for Merton, Tbiedive Trstuction Pienca (ther ouput canbe viewed by using WINDOW. © Mince tot 12 FHS Dual eerie En Ey Machine Hours 1 2 = ‘00 ‘08 Metal Semin 2 2 = 000 500 Model 101 Assembly 2 o = ‘5000 0 Masel 102 Assembly 0 3 = 4500 0 /Soution-> 2000) 4000 44000000 (b) What would be the best product mix if engine assembly capacity were raised by one unit, from 4,000 to 4,001 machine-hours? What is the extra unit of capacity worth? Ans: Dual value for one unit of Machine hour is 2000. So each unit change in machine hour will change the total contribution margin by 2000. Tiective Traction ‘@ini Thee ate mere results availabe in additonal window © Mrinice Tor 12 FHS Daal eames 00 ion Machine Hours 1 3 = “04 “08 Metal Samcina 2 2 000) 500 Madel 101 Assembly 2 0 ‘5000 0 Morel 102 Assembly 9 3 4500 0 [Soution-> 799) 701 ionz000 (©) Assume that a second aditional unit of engine assembly capacity is worth the same as the first. Verify that if the capacity were increased to 4,100 machinehours, then the increase in contribution would be 100 times that in part (b). Objective Maize © Mime stiction Thee aie mere results avalabe in adctonal window Tor v2 FHS Daal Naame ar ia Machine Hours 1 2 = ‘100 "2000 Metal Samging 2 2 = 000 500 Medel 101 Assembly 2 o = 000 a Made! 102 Assembly ° 3 = 4500 0 [Soution-= 700) 7100 "14200000 MIC hour increased to 4100, thus contribution margin increased to 112000000, which is 200000 more than when machine hour is 4000. In option b, Contribution margin is increased by 2000. Hence in C, the increase is 100 times that of b. (d) How many units of engine assembly capacity can be added before there is a change in the value of an additional unit of capacity? If the machine hours are increased, for each increase in machine hour, one additional unit of Model 102 to be produced & one unit less model 101 to be produced. 1000 hours Metal stamping is surplus, which can produce additional 500 units of any model 101 or 102. That means, if additional m/s hour addition crosses 500, Metal stamping capacity needs to be increased.