American University of Beirut - Faculty of Engineering and Architecture

Fall 2020 - INDE 302: Operations Research 1

Dr. Hussein Tarhini
Project

The Sheridan Motor Company manufactured two specialized models of trucks in a single plant.
Manufacturing operations were grouped into four departments: metal stamping, engine assembly,
Model 101 assembly, and Model 102 assembly. Monthly production capacity was limited by the number
of machine hours available in each department, as indicated in Table 1. The table also shows the amount
of time each of the two models required for production in each department. The prices to dealers of the
two models, f.o.b. the Sheridan plant, were $2,100 for the Model 101 and $2,000 For Model 102.
Sheridan followed the price leadership of one of the larger manufacturers in the industry.
As a result of a sellers’ market in 1953, Sheridan was able to sell as many trucks as it could produce. The
production schedules it had followed during the first six months of the year resulted in a monthly output
of 600 Model 101 trucks and 1,400 Model 102 trucks. At this level of production, both the Model-102-
assembly and the engine-assembly departments were operating at capacity, but the metal-stamping
department was operating at only 64% of capacity and the Model-101-assembly department was at only
27%. Standard costs at this level of production are given in Table 2, and further details on overhead
costs are in Table 3.

At a monthly planning session of the company’s executives in July 1953, dissatisfaction was expressed
with the company’s profit performance as reported in the six-month income statement just prepared
(see Table 4). The sales manager pointed out that it was impossible to sell the Model 101 truck to yield a
profit and suggested that it be dropped from the line in order to improve over-all profitability.

The controller objected to this suggestion. “The real trouble, Dick, is that we are trying to absorb the
entire fixed overhead of the Model 101 assembly department with only a small number of units
production. Actually these units are making a contribution to overhead, even though it’s not adequate
to cover fixed costs, and we’d be worse off without them. In fact, it seems to me quite possible that
we’d be better off increasing production of Model 101 trucks, cutting back if necessary on Model 102
production.”

The production manager pointed out that there was another way in which output of Model 101 trucks
could be stepped up, which would not require a cutback in Model 102 production. This would be
through purchase of engines from an outside supplier, thus relieving the present capacity problem in the
engine assembly department. If this course of action were followed, Sheridan would probably furnish
the supplier with the necessary materials but would reimburse him for his labor and overhead.

At this point, the president entered the discussion. He asked the controller, the sales manager, and the
production manager to get together to consider the two questions raised by their comments and to
report their recommendations to him the next day. The two questions were: (1) Assuming no change in
present capacity and demand, what would be the most profitable product mix? (2) What was the
maximum labor and overhead charge Sheridan could afford to pay for engines if it purchased them from
an outside supplier?

Table 1: Sheridan Production Data

Department Machine Hours

Monthly Capacity (machine hours) Needed Per Truck

Model 101 Model 102

Metal Stamping 7000 2.8 2.0
Engine assembly 4080 1.2 2.4
Model 101 assembly 4500 2.0 -
Model 102 assembly 4480 - 3.2

Table 2: Standard Costs of Two Truck Models

Model Model
101 102
Direct
Materials $1,200 $1,000
Direct Labor
Metal
Stamping $40 $30
Engine
Assembly $60 $120
Final
Assembly $100 $75
Overhead
Metal
Stamping $204 $160
Engine
Assembly $130 $250
Final
Assembly $400 $179
Total $2,134 $1,814
Table 3: Overhead Budget for 1953

Variable
Total Overhead/Unit
Overhead Fixed Overhead Model Model
Department Per Month Per Month 101 102
Metal Stamping $347,000 $135,000 $120 $100
Engine Assembly $428,000 $85,000 $105 $200
Model 101
Assembly $240,000 $135,000 $175 -
Model 102
Assembly $250,000 $75,000 - $125
Total $1,265,000 $430,000 $400 $425
Total Overhead Per Month is based on planned 1953 production rate of 600 Model 101 trucks and 1,400
Model 102 trucks per month.
Fixed Overhead Per Month was distributed to models in proportion to degree of capacity utilization.

Table 4: Income Statement for Six Months (thousands of dollars)

Net Sales $24,360

Cost of Goods Sold $22,920
Gross Margin $1,440
Selling, Administrative and General Expense $1,051
Net income Before Tax $389
Taxes on Income $206
Net Income After Taxes $183

Note: For each of these questions, start from the basic assumptions of the case. Do not carry over
additional assumptions from one numbered question to the next.
1) What would be your reply to the questions raised by the president?
2) Find the best product mix for Sheridan Motors under the basic assumptions of the case
3) What is the best product mix if engine assembly capacity is raised to 4,081? What is an extra
hour of engine assembly capacity worth?
4) What are 1,000 additional hours of engine assembly capacity worth? What about 1,100 hours?
5) Find the best product mix if it is found that the stamping department spends 2.0 hours on each
Model 102 (as in the case), but 3.5 hours on each Model 101.
6) Sheridan Motors is considering introducing a new economy truck, to be called (cleverly enough)
the Model 103. The new model requires 2.3 hours of metal stamping capacity and 1.6 hours of
engine assembly capacity. The 103’s could be assembled in the 101 assembly department; each
103 would require only half as much time as a 101. Each Model 103 truck would give a
contribution of $225.
 a) Formulate the production decision with the three trucks as a linear programming
problem and then solve the problem to verify that no Model 103’s should be produced.
b) How much would it cost in terms of contribution if, for some other reasons,
management insisted that at least one Model 103 be made?
c) How high would the contribution on each 103 have to be before it became attractive to
produce the new model?

Note: The project is individual. Make sure you submit all python/Excel file you used.