3. Merton is considering the introduction of a new truck, to be called Model 103. Each Model 3 truck would give a contribution of $2,000. The total engine assembly capacity would be sufficient to produce 5,00 Model 103s per month, and the total metal stamping capacity would be sufficient to produce 4,000 Model 103s. The new truck would be assembled in the Model 101 assembly department, each Model 103 truck requiring only half as much time as a model 101 truck.
(a) Should Merton produce Model 103 trucks?
(b) How high would the contribution on each Model 103 truck have to be before it became worthwhile to produce the new model?
Table A Machine-hours: Requirements and Availability Machine-hours Required per Thick Model 101 Model 102 Total Machine-hours Available per Month Department Engine assembly Metal stamping Model 101 assembly Model 102 assembly 4,000 6,000 5,000 4,500 Table B Standard Product Costs Model 101 $24,000 Model 102 $20,000 Direct materials Direct labor Engine assembly Metal stamping Final assembly 1,200 800 2000 2,400 600 1,500 4,000 2,525 4,850 Overhead" Engine assembly Metal stamping Final assembly 3,480 3,080 6.200 3.500 12.205 $40.205 11.430 $35.930 Total a. See Tholec Table C Overhead Budget for 1988 Total Overhead per Month (5 millions) Fixed Overhead per Month (5 millions) Variable Overhead/Unit Model 101 Model 102 Department Engine assembly Metal stamping Model 101 assembly Model 102 assembly $4,000 2,000 9.80 8.10 6.20 5.25 1.70 2.70 2.70 1.50 8.60 $2,100 2,400 3,500 2935 $8,000 2.500 $8,500 a. Based on a monthly production rate of 1,000 Model 101 trucks and 1,500 Model 102 trucks b. Pued overhead was distributed to the two truck models in proportion to degree of capacity utilization, Problems 1. (a) Find the best product mix for Merton. (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? (c) 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). (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? 2. Merton's production manager suggests purchasing Model 101 or Model 102 engines from an outside supplier in order to relieve the capacity problem in the engine assembly department. If Merton decides to pursue this alternative, it will be effectively "renting" capacity: furnishing the necessary materials and engine components, and reimbursing the outside supplier for labor and overhead. Should the company adopt this alternative? If so, what is the maximum rent it should be willing to pay for a machine-hour of engine assembly capacity? What is the maximum number of machine-hours it should rent? 3. Merton is considering the introduction of a new truck, to be called Model 103. Each Model 103 truck would give a contribution of $2,000. The total engine assembly capacity would be sufficient to produce 5,000 Model 103s per month, and the total metal stamping capacity would be sufficient to produce 4,000 Model 103s. The new truck would be assembled in the Model 101 assembly department, each Model 103 truck requiring only half as much time as a Model 101 truck. (a) Should Merton produce Model 103 trucks? (b) How high would the contribution on each Model 103 truck have to be before it became worthwhile to produce the new model
