Professional Documents
Culture Documents
CHAPTER
Tactical
Decision
Making
17 -2
Objectives
Objectives
1. Describe the After
tactical
decision-making
model.
studying
this
After studying this
2. Explain howchapter,
the activity
resource
usage model
you
should
chapter, you should
is used in assessing
relevancy.
be
be able
able to:
to:
3. Apply tactical decision-making concepts in a
variety of business situations.
4. Choose the optimal product mix when faced
with one constrained resource.
5. Explain the impact of cost of pricing decisions.
17 -3
Objectives
Objectives
6. Use linear programming to find the optimal
solution to a problem of multiple constrained
resources. (Appendix)
17 -4
$345,000
135,000
$460,000
17 -5
17 -6
17 -7
17 -8
Relevant
Relevant Costs
Costs Defined
Defined
Relevant
Relevant costs
costs are
are future
future costs
costs that
that differ
differ
across
across alternatives.
alternatives. A
Acost
cost must
must not
not only
only
be
be aa future
future cost
cost but
but most
most also
also differ
differ
between
between alternatives.
alternatives.
17 -9
Flexible
Flexible resources
resources can
can be
be
easily
easily purchased
purchased in
in the
the amount
amount
needed
needed and
and at
at the
the time
time of
of use
use
like
like electricity.
electricity.
17 -10
Committed
Committed resources
resources are
are
purchased
purchased before
before they
they are
are used,
used,
such
such as
as salaried
salaried employees.
employees.
17 -11
Activity
Activity Resource
Resource Usage
Usage Model
Model and
and
Assessing
Assessing Relevancy
Relevancy
Flexible
FlexibleResources
Resources
a. Demand Changes
Relevant
b. Demand Constant
Not Relevant
17 -12
Activity
Activity Resource
Resource Usage
Usage Model
Model and
and
Assessing
Assessing Relevancy
Relevancy
Committed
CommittedResources
Resources
(Short-Term)
(Short-Term)
Supply Demand = Unused Capacity
a.. Demand Increased < Unused Capacity
Not relevant
b. Demand Increased > Unused Capacity
Relevant
c. Demand Decease (Permanent)
1. Activity Capacity Reduced
Relevant
2. Activity Capacity Unchanged
Not Relevant
17 -13
Activity
Activity Resource
Resource Usage
Usage Model
Model and
and
Assessing
Assessing Relevancy
Relevancy
Committed
CommittedResources
Resources
(Multiperiod
(MultiperiodCapacity)
Capacity)
Supply Demand = Unused Capacity
a.. Demand Increased < Unused Capacity
Not relevant
b. Demand Decreased (Permanent)
Relevant
c. Demand Increase > Unused Capacity
Capital Decision
Illustrative Examples of
Relevant Cost Applications
Make or Buy
Keep or Drop
Special Order
Sell or Process Further
Product Mix
Important:
Important: Short-term
Short-termPerspective
Perspective
17 -14
Make
Make or
or Buy
Buy
Swasey Manufacturing currently produces an
electronic component used in one of its printers.
Swasey must produce 10,000 of these parts. The
firm has been approached by a supplier who
offers to build the component to Swaseys
specifications for $4.75 per unit.
17 -15
Make
Make or
or Buy
Buy
The full absorption cost for the 10,000 parts is
computed as follows:
Total Cost Unit Cost
Rental of equipment
$12,000
$1.20
Equipment depreciation
2,000
0.20
Direct materials
10,000
1.00
Direct labor
20,000
2.00
Variable overhead
8,000
0.80
General fixed overhead
30,000
3.00
Total
$82,000
$8.20
Enough material is on hand to make 5,000 parts.
17 -16
17 -17
Make
Make or
or Buy
Buy
$12,000
5,000
20,000
8,000
------------$45,000
Make
Make
------------------------$47,500
8,500
$56,000
$12,000
5,000
20,000
8,000
-47,500
- 8,500
$-11,000
Keep-or-Drop
Keep-or-Drop Decisions
Decisions
17 -18
Keep-or-Drop
Keep-or-Drop Decisions
Decisions
17 -19
Differential
Keep
Sales
$150
Less: Variable expenses 140
Contribution margin
$ 10
Less: Advertising
-10
Cost of supervision -35
Total relevant benefit
(loss)
$- 35
Drop
---------------$ 0
Amount
$150to Keep
140
$ 10
-10
-35
$- 35
Preliminary
Preliminary figures
figuresindicate
indicatethat
thatthe
thetile
tile
segment
segment should
should be
be dropped!
dropped!
Keep-or-Drop
Keep-or-Drop Decisions
Decisions
17 -20
Drop Amount
to Keep
$1,186.0
$264.0
666.6
203.4
$ 519.4
$ 60.6
-20.0
-10.0
-77.0
-35.0
$ 422.4
$ 15.6
Keep
Keeproofing
roofingtile
tilesegment!
segment!
Keep-or-Drop
Keep-or-Drop Decisions
Decisions
Alternate
AlternateUse
Useof
ofFacilities
Facilities
The marketing manager sees the market for floor tile as
stronger and less competitive than roof tile. He submits the
following figures for floor tile sales:
Sales
Less: Variable expenses
Contribution margin
Less: Direct fixed expenses
Segment margin
$100,000
40,000
$ 60,000
55,000
$ 5,000
17 -21
Keep-or-Drop
Keep-or-Drop Decisions
Decisions
17 -22
Alternate
AlternateUse
Useof
ofFacilities
Facilities
Drop and
Differential
Keep $1,286.00
Replace Amount
to Keep
Sales
$1,450
$164.00
Less: Variable expenses
870
706.60
163.40
Contribution margin $ 580
$ 579.40
$ 0.60
$1,450
$150
$50$140
$64 +
$870
$25 $100
$38.40 +
Decision:
roof
Decision: Continue
Continue making
making
roof tile!
tile!
$40
Special-Order
Special-Order Decisions
Decisions
An ice cream company is
operating at 80 percent of its
productive capacity (20 million
half gallon units). The unit costs
associated with producing and
selling 16 million units are shown
on the next slide.
17 -23
Special-Order
Special-Order Decisions
Decisions
Wholesale
price =
$2.00
Variable costs:
Dairy ingredients
Sugar
Flavoring
Direct labor
Packaging
Commissions
Distribution
Other
Total variable costs
Total fixed costs
Total costs
$ 0.70
0.10
0.15
0.25
0.20
0.02
0.03
0.05
$ 1.50
0.097
$1.597
17 -24
Special-Order
Special-Order Decisions
Decisions
17 -25
17 -26
Special-Order
Special-Order Decisions
Decisions
Which costs
are irrelevant?
Variable costs:
Dairy ingredients
Sugar
Flavoring
Direct labor
Packaging
Commissions
Distribution
Other
Total variable costs
Total fixed costs
Total costs
$0.70
0.10
0.15
0.25
0.20
0.02
0.03
0.05
$1.50
$1.45
0.097
$1.45
$1.597
Special-Order
Special-Order Decisions
Decisions
Which costs
are irrelevant?
Accept
the
Acceptcosts:
the offer
offer ($0.10
($0.10
Variable
xxDairy
2,000,000
==$200,000
2,000,000
$200,000
ingredients
more
more profit).
profit).
Sugar
Flavoring
Direct labor
Packaging
Commissions
Distribution
Other
Total variable costs
Total fixed costs
Total cost
$ 0.70
0.10
0.15
0.25
0.20
0.02
0.03
0.05
$$1.45
1.50
0.097
$1.45
$1.597
17 -27
17 -28
Further Processing
Grade A
800 lb
Sell for $0.40 lb
Joint Cost
$300
Grade B
600 lb
Bagged
120 Bags
Cost $0.05/Bag
Sell for $1.30/Bag
Grade C
600 lb
Applesauce
500 16-oz Cans
Cost $0.10/lb
Sell for $0.75 can
17 -29
Revenues
Processing cost
Total
Process
Further
$450
120
$330
Sell
$150
---$150
Further
Further process!
process!
Differential Amount
to Process Further
$300
120
$180
17 -30
17 -31
Cost-Based Pricing
Revenues
Cost of goods sold:
Direct materials
Direct labor
Overhead
Gross profit
Selling and administrative expenses
Operating income
$856,500
$489,750
140,000
84,000
713,750
$142,750
25,000
$117,750
17 -32
$100,000
9,000
5,400
$114,400
22,880
$137,280
17 -33
17 -34
17 -35
Legal
Legal Aspects
Aspects of
of Pricing
Pricing
Predatory pricing. The practice of setting prices
below cost for the purpose of injuring or
eliminating competitors.
Price discrimination. Charging different prices to
different customers for essentially the same
product.
The
The Robinson-Patman
Robinson-PatmanAct
Act isis the
the most
most potent
potent
weapon
weapon against
against price
price discrimination,
discrimination, but
but itit doesnt
doesnt
cover
cover services
services and
and intangibles.
intangibles.
17 -36
Linear
Linear Programming
Programming
The maximum demand for Gear X is 15,000 units and
the maximum demand for Gear Y is 40,000 units. The
contribution margin for X is $25 and for Y is $10.
Z = $25X x $10Y
Two machine hours are used for each unit of Gear X,
and 0.5 machine hour is used for a unit of Gear Y.
2X + 0.5Y 40,000
17 -37
Linear
Linear Programming
Programming
Max. Z = $25X x $10Y
Subject to:
2X + 0.5Y 40,000
X 15,000
Y 40,000
X0
Y0
17 -38
80
75 Machine Hours Constraint
2X + 0.5Y 40,000
70
65
60
Demand Constraint
55
X 15,000
50
45
E
D
40
Demand Constraint
35
Y 40,000
30
25
C
20 Feasibility
15 Region
10
5
A |
|
|B
|
|
0
5
10
15
20
25
17 -39
Linear
Linear Programming
Programming
Corner Point
A
B
C
D
E
X-Value
0
15
15
10
0
Y-Value
0
0
20
40
40
Z = $25X + $10Y
$ 0
375
575
650
400
17 -40
Chapter Seventeen
The
The End
End
17 -41