Assignment #1: Merton Truck Company

Question 1: What is the contribution toward fixed costs if only Model 101 is built?

Allocated fixed overhead should not be included in deciding the contributions. There is a logical

error that this profitability comparison between Model 101 and Model 102 is based on their

current production levels. Instead, the goal should be to determine the profit maximizing levels

of the two models based on their relative profitability. The correct approach is to keep the total

fixed overhead separate because they will be incurred regardless of the production level

decisions.

Unit contribution toward fixed costs of Model 101

= Sale price of Model 101 – Direct materials cost – Direct labor cost – Variable overhead

= $39,000 - $24,000 - $4,000 - $8,000 = $3,000/Unit

Solving the problem by using Excel Solver with Simplex LP option:

= Unit contribution toward fixed costs of Model 101 * Number of Model 101 trucks produced

= $3,000 * 2,500

= $7,500,000

Question 2: What is the contribution toward fixed costs if only Model 102 is built?

Unit contribution toward fixed costs of Model 102

= Sale price of Model 102 – Direct materials cost – Direct labor cost – Variable overhead

= $38,000 - $20,000 - $4,500 - $8,500 = $5,000/Unit

Solving the problem by using Excel Solver with Simplex LP option:

= Unit contribution toward fixed costs of Model 102 * Number of Model 102 trucks produced

= $5,000 * 1,500

= $7,500,000

Question 3: What is the total contribution toward fixed costs using their current mix of

1000 Model 101 trucks and 1500 Model 102 trucks?

Total contribution toward fixed costs

= Unit contribution toward fixed costs of Model 101 * Number of Model 101 trucks produced

+ Unit contribution toward fixed costs of Model 102 * Number of Model 102 trucks produced

= $3,000 * 1,000 + $5,000 * 1,500

= $10,500,000
Question 4: Can you show a product mix that improves the contribution?

Maximize the contribution: 3000 * X101 + 5000 * X102

Constraints:

Engine Assembly: 1 * X101 + 2 * X102 ≤ 4000

Metal Stamping: 2 * X101 + 2 * X102 ≤ 6000

Model 101 Assembly: 2 * X101 ≤ 5000

Model 102 Assembly: 3 * X102 ≤ 4500

X101 ≥ 0; X102 ≥ 0

Solving the problem by using Excel Solver with Simplex LP option:

Total contribution toward fixed costs

Unit contribution toward fixed costs of Model 102 * Number of Model 102 trucks produced

= $3,000 * 2,000 + $5,000 * 1,000

= $11,000,000

Assignment #2: National Cranberry Cooperative

Question 1: What are the most critical problems facing National Cranberry that Mr.

Schaeffer must address?

Answer:

1) Overtime cost for the plant is high and out of control;

2) Cranberry growers were upset that their trucks and drivers had to spend so much time waiting

to unload process fruit into the receiving plant (High truck rental costs for growers);
3) The demand for cranberries is stable while the production is not stable. In addition, the

proportion of water harvested cranberries is increasing significantly to about 70%, so more bins

are needed.

Question 2. For your numerical analysis, consider a day where 18,000 barrels of berries

arrive of which 70% are wet. Assume that trucks arrive evenly spaced throughout an 11-

hour day starting at 7:00 am, and that processing operations (i.e. receiving, dechaffing,

milling, etc.) also start at 7:00 am. Estimate the number of hours the plant must operate to

complete the day’s work.

Answer: 18,000 barrels of berries with 70% of the berries are wet

⇨ Total number of wet berries: 18000 x 70% = 12600 bbl/day

Bottleneck at dry units for wet berries with processing rate of 600 bbl /hr

⇨ 12600/600 = 21hr. Thus, it will take 21.0 hours to process

Question 3. When during the day would trucks be waiting? how much truck waiting time

would you expect?

Answer: Berries arrives evenly over 11 hr from 7:00 am

=>RPI process 12600/11=1146 bbl/hr

Inventory build-up rate = arrival rate-processing rate

The holding capacity of the bins for wet berries is: 2000 + 1200 = 3200 bbl

⇨ Bins will be full in 3200/546 = 5.86 hrs

⇨ Trucks will start to wait after 5.86 hrs after 7am.

After 11hrs, inventory is 546 X 11 = 6006 bbl

⇨ 3200 bbl is in bins and 2806 bbl is in trucks

⇨ At processing rate of 600 bbl/hr, it takes 2806/600 = 4.68 hr to process berries in trucks

⇨ Total waiting time: 12 + 4.68 – 5.86 = 10.82 hrs

Question 4. Suppose the cost of renting trucks with drivers is $18.00/hour. Based on your

analysis, what recommendations would you make to Mr. Schaefer?

Answer: It takes 21hr to process, so overtime is 21-11=10hr

At $18/hr, they need to pay 18 x 1.5 x 10 = $270/truck for overtime cost

⇨ Total # of truck is 2200/75 = 29.33

⇨ Total amount to pay = 29.33 x 270 = $7919

Currently, they have 16 dry barrels, 8 wet & dry barrels, 3 wet barrels = 27 barrels

To hold the wet berries in future, they need 70% of them to be wet barries

⇨ 27 X 70% = 19 barrels for wet; now they have 8+3 = 11 barrels for wet

⇨ Need to convert 19-11= 8 dry bins to hold wet barriers

Another option is to add additional dryer to solve the bottleneck rate issue, which is $25000

Thus, among these two options, Mr. Schaefer should consider adding a dryer

Question 5: Suppose the cost of converting dry berry holding bins so they can store either

water-harvested or dry berries drops to $2,000 per bin. If everything else remains

unchanged, how would this cost reduction affect your recommendations?

Answer:

To hold the wet berries in future, they need 70% of them to be wet barrels

⇨ 27 X 70% = 19 barrels for wet; now they have 8+3 = 11 barrels for wet

⇨ Need to convert 19-11= 8 dry barrels to hold wet barriers

⇨ Cost = 2000 X 8 = $ 16000

Another option is to add additional dryer to solve the bottleneck rate issue, which is $25000

Thus, comparing these two options, Mr. Schaefer should consider converting 8 holding bins for

wet berries.

Question 6. What is the capacity (in bbl. per hour) of receiving plant 1 (RP1)?

Answer:
1) If wet berries consistently make up 70% of total berries, 600 bbl/hr for wet berries (limited by

dryer capacity), plus 18,000 x 30%/11hr = 490.90 for dry berries. Total capacity of RP1 is

1090.9 bbl/hour.

2) If there is no limit to the percentage of wet berries: the capacity of RP1 is 1200 bbl. per

hour, which is limited by separator lines.