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Merton LP Formulation

The objective of Merton Truck Company is to maximize profits. Merton is not able to increase profits due to possible reasons such as wrong production quantity decisions and capacity problems. The decision Merton needs to take to increase profits is to select the appropriate production quantities for both of its models, Model 101 and Model 102, to maximize total profits. This can be represented as a linear programming problem with decision variables X1 and X2 denoting the production quantities of Model 101 and 102 respectively. The objective is to maximize the total contribution or profits, and it is subject to constraints on production capacities of different departments like engine assembly, stamping, and final assembly. The problem can be solved using optimization software like Excel Solver, Ilog

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25 views21 pages

Merton LP Formulation

The objective of Merton Truck Company is to maximize profits. Merton is not able to increase profits due to possible reasons such as wrong production quantity decisions and capacity problems. The decision Merton needs to take to increase profits is to select the appropriate production quantities for both of its models, Model 101 and Model 102, to maximize total profits. This can be represented as a linear programming problem with decision variables X1 and X2 denoting the production quantities of Model 101 and 102 respectively. The objective is to maximize the total contribution or profits, and it is subject to constraints on production capacities of different departments like engine assembly, stamping, and final assembly. The problem can be solved using optimization software like Excel Solver, Ilog

Uploaded by

ribhavrm
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Merton Truck Company Case

1
What is the objective of Merton

2
• Objective is to maximize profits for Merton

3
Why Merton is not able to increase profits

4
Possible Reasons
• Wrong decisions on production quantities

• Capacity problems

5
What decision the Merton has to take to
increase profits

6
• Selection of appropriate production quantities
for both models that maximize profits

• These are called decision variables in


mathematical programming language.

7
Representing linear program in
mathematical form
• Representation of decision variables
• Representation of objective function
• Representation of constraints

8
Representation of Decision Variable
• Let X1 denote the number of Model 101 units
that should be produced

• Let X2 denote the number of Model 102 units


that needs to be produced

9
Representation of Objective Function
• Profits = Contribution – Fixed Cost

• Where contribution = revenue – variable production


costs

• Selection of functional form to represent sub terms .

• Linear ?
• Non linear – logarithmic, exponential ?
10
We need to ask following questions to
ourselves
• How does Revenue, variable production cost,
production time functions vary with the production
quantity ?

• Proportional – are functions proportional to the level


of production quantity
• Additive – do production quantity level affect above
relationship s
• Divisible – can quantities be fractional
• Certainty
• Data 11
• Selection of Linear Model in our case

12
Calculation of correct per unit production
costs and overheads !
•

13
Model 101 Variable Production Cost
• Direct Materials : 24000 $

• Direct Labor : Engine + Stamping + Final Assmb


• = 1200 + 800 + 2000 = 4000

Variable Overhead = Engine+ Metal + 101 Assmb


= 2100 + 2400 + 3500=8000

Per unit Variable Production Cost for 101 = 36000


14
Model 101 Contribution
• Model 101 per unit contribution =
• Selling price per unit - variable cost per unit
• 39000 – 36000 = 3000 dollars

15
Representation of Objective Function
• Metron’s Profits =

• 3000 X1 + 5000 X2 - 8.6 (millions)

• Can we get the profits that we want ?

16
Representation of Constraint
• Engine Assembly Constraint ?

• 1 X1 + 2 X2 <= 4000

• What would be stamping department


constraint ?

17
Final Assembly Constraint
• 101 Assembly constraint

• 2 X1 <= 5000

• What would be 102 Assembly constraint ?

18
Final Mathematical Model
• Maximize : 3000 X1 + 5000 X2 - 8.6 (millions)

• Subject to constraints :
• 1 X1 + 2 X2 <= 4000 engine
• 2X1 + 2X2 < = 6000 stamping
• 2 X1 <= 5000 101 Assembly
• 3 X2 <= 4500 102 Assembly

19
What Next ?

20
Solution Process
• Software's such as Solver ( limited version in
Excel, unlimited could be purchased from
Frontline solvers), Ilog-Cplex and Xpress are
well-known and widely used.

21

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