Merton

In: Business and Management

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REV. APRIL 18, 1990

ANIRUDH DHEBAR

Merton Truck Company

At Merton's monthly planning meeting in July 1988, the company's president expressed dissatisfaction with Merton's financial performance during the six-month period January-June 1988.
"I know we are operating at capacity in some of our production lines," he remarked to Merton's controller and sales and production managers. "But surely we can do something to improve our financial position. Maybe we should change our product mix. We don't seem to be making a profit on our Model 101 truck. Why don't we just stop making it altogether? Maybe we should purchase engines from an outside supplier, relieving the capacity problem in our engine assembly department.
Why don't the three of you get together, consider the different options, and come up with a recommendation?" Production Possibilities and Standard Costs

No

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 Model 102 assembly.

Do

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 (4,000 machine-hours available ÷ 1 machine-hour required per truck) or 2,000
Model 102 trucks per month (4,000 machine-hours available ÷ 2 machine-hours per truck), if devoted fully to either model. Of course, Merton could also assemble engines for both models: for example, if…...

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