Caso Merton

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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 andproduction 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 102assembly.

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 101trucks 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
1,000 Model 101 trucks were produced, sufficient engine assembly capacity was available for 1,500Model 102 trucks ([4,000 - 1,000 * 1.0] / 2.0). Data on the machine-hour requirements for each truck
model in each department and the monthly machine-hour availability in the departments are given in
Table A. The company could sell as many trucks as it could produce.

Merton's production schedule for the first six months of 1988 had resulted in a monthly output of
1,000 Model 101 trucks and1,500 Model 102 trucks. At this level of production, Model 102 assembly
and engine assembly were operating at capacity. However, metal stamping and Model 101 assembly
were operating at only 83.3% and 40% of capacity, respectively. Table B gives standard costs at this
level of production; Table C gives details on overhead costs________________________________________________________________________________________________________________
Professor Anirudh Dhebar prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an
administrative situation. The case is based on Sherman Motor Company, HBS case #9-107-010.
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MertonTruck Company

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Meeting of the Controller, Sales Manager, and Production Manager

"I have been studying the figures for standard costs for the two truck models," the sales manager
began. "Why don't we just stop making Model 101 trucks? As I see it, we are losing $1,205 for each
Model 101 truck we sell." (A Model 101 truck sold for $39,000, a Model 102 truck for $38,000.)...