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2
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
1. Describe the tactical decision-making
model.
2. Explain how the activity resource usage
model is used in assessing relevancy.
3. Apply tactical decision-making concepts in
a variety of business situations.
Continued
3
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
4. Choose the optimal product mix when
faced with one constrained resource.
5. Explain the impact of cost on pricing
decisions.
6. Use linear programming to find the optimal
solution to a problem of multiple
constrained resources. (Appendix)
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Questions to Think About
4
QUESTIONS TO THINK ABOUT:
Tidwell Products, Inc.
5
QUESTIONS TO THINK ABOUT:
Tidwell Products, Inc.
6
QUESTIONS TO THINK ABOUT:
Tidwell Products, Inc.
7
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
8
LO 1
Is there a difference
between tactical and
strategic decisions?
9
LO 1
TACTICAL
TACTICAL DECISION
DECISION MAKING:
MAKING:
Definition
Definition
10
LO 1
STRATEGIC
STRATEGIC DECISION
DECISION MAKING:
MAKING:
Definition
Definition
11
LO 1
TACTICAL MODEL
A general approach to tactical decision making
includes:
1. Recognize, define the problem
2. Identify alternatives, eliminating those that are
unfeasible
3. Identify costs & benefits
4. Total relevant costs, benefits of each
alternative
5. Assess qualitative factors
6. Select alternative with greatest overall benefit
12
LO 1
TIDWELL
TIDWELL PRODUCTS:
PRODUCTS: Background
Background
Tidwell
TidwellProducts
ProductsInc.
Inc.isisfacing
facingexpanded
expanded
production
productionthat
thatisisstraining
strainingthethecapacity
capacityinin
facilities
facilitieswith
with55years
yearsremaining
remainingon ontheir
their
lease.
lease.Two
Twofeasible
feasiblealternatives
alternativesunder
under
consideration
considerationarearea)a)totorent
rentananadditional
additional
building
buildingfor
forwarehousing
warehousingand andb)b)outsource
outsource
production.
production.TheTheCFOCFOwillwillprepare
prepareaareport
reportof
of
detailed
detailedcosts
costsfor
forthese
thesealternatives.
alternatives.
13
LO 1
APPLYING
APPLYING TACTICAL
TACTICAL MODEL
MODEL
Step 1: Define the problem Increase capacity for warehousing
& production
Step 2: Identify alternatives 1. Build new facility
2. Lease larger facility; sublease
current facility
3. Lease additional facility
4. Lease warehouse space
5. Buy shafts & bushings; free
up space
Continued
14
LO 1
APPLYING
APPLYING TACTICAL
TACTICAL MODEL
MODEL
Step 3: Identify costs, benefits Alt 4: <Costs> + Benefits
Alt 5: <Costs> + Benefits
Step 4: Total relevant costs & Alt 4: Relevant <Costs> + Benefits
benefits Alt 5: Relevant <Costs> + Benefits
Differential cost
Step 5: Assess qualitative factors 1. Quality of external supplier
2. Reliability of external
supplier
3. Price stability
4. Labor relations & community
image
Continued
16
LO 1
Alt. 5: 460,000
Differential cost $ 20,000
RELEVANT
RELEVANT COSTS:
COSTS: Definition
Definition
18
LO 1
RELEVANT COSTS
ILLUSTRATED
In
InTidwell
TidwellProducts’
Products’decision,
decision,the
thecost
costof
ofdirect
direct
labor
labor($150,000
($150,000of ofvariable
variableproduction
productioncosts)
costs)
isisaarelevant
relevantcost
costbecause
becauseititdiffers
differsbetween
between
Alternatives
Alternatives#4 #4&.
#5.
There
Thereisisnonolabor
laborcost
costififshafts
shafts&
&bushings
bushingsare
are
purchased
purchasedexternally.
externally.
19
LO 1
IRRELEVANT COSTS
ILLUSTRATED
In
InTidwell
TidwellProducts’
Products’decision,
decision,thethe
depreciation
depreciationcost
costof
ofthe
theleased
leasedbuilding
building
isisirrelevant
irrelevantbecause
becauseititisisaasunk
sunkcost
cost
that
that
a)a) IsIsnot
notaffected
affectedbybyfuture
futureactions;
actions;
b)
b) Can
Cannotnotbe
beavoided;
avoided;and
and
c)c) Does
Doesnotnotdiffer
differacross
acrossalternatives.
alternatives.
20
LO 1
22
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
2
Explain how the activity
resource usage model is
used in assessing
relevancy.
23
LO 2
24
LO 2
FLEXIBLE
FLEXIBLE RESOURCES:
RESOURCES:
Definition
Definition
25
LO 2
COMMITTED
COMMITTED RESOURCES:
RESOURCES:
Definition
Definition
26
LO 2
MANUFACTURING
MANUFACTURING FIRM:
FIRM:
Background
Background
AAmanufacturing
manufacturingfirm
firmemploys
employsfive
five(5)
(5)
engineers
engineerswith
withaacapacity
capacityof
of10,000
10,000
engineering
engineeringhours
hours(2,000
(2,000hours
hourseach)
each)atat
aacost
costof
of$250,000
$250,000($25
($25per
perhour).
hour).The
The
firm
firmexpects
expectsto
touse
useonly
only9,000
9,000
engineering
engineeringhours
hoursduring
duringthe
thecurrent
current
year,
year,producing
producingunused
unusedcapacity.
capacity.
27
LO 2
28
LO 2
Would circumstances be
different if the special order
uses 1,500 engineering hours?
29
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
3
Apply tactical decision-
making concepts in a
variety of business
situations.
30
LO 3
TACTICAL DECISION-
MAKING: Examples
Make-or-Buy Decisions
Keep or Drop
Keep or Drop & Replace
Special order
Sell or process further
31
LO 3
SWASEY
SWASEY MANUFACTURING
MANUFACTURING ::
Make-or-Buy
Make-or-Buy Background
Background
Swasey
SwaseyManufacturing,
Manufacturing,aaprinter
printermanufacturer,
manufacturer,
will
willswitch
switchto
toaaprinter
printerthat
thatdoes
doesnot
notuse
usean
an
electronic
electroniccomponent
componentititcurrently
currentlyproduces.
produces.
Should
ShouldSwasey
Swaseyproduce
produce10,000
10,000
components
componentsforforthe
theolder
olderprinter
printerthis
thisyear
year
or
orshould
shouldthey
theypurchase
purchasethe
thecomponent
componentforfor
$4.75?
$4.75?
Continued
32
LO 3
SWASEY
SWASEY MANUFACTURING
MANUFACTURING ::
Make-or-Buy
Make-or-Buy Background
Background
Continued 33
LO 3
SWASEY’S
SWASEY’S TACTICAL
TACTICAL
MODEL:
MODEL: Make-or-Buy
Make-or-Buy
Step 1: Define the problem Have component available for old
printer
Step 2: Identify alternatives 1. Make component
2. Buy component
Step 3: Identify costs, benefits 1. Make: $8.20
2. Buy: $475
Step 4: Total relevant costs & Omit depreciation & allocated
benefits fixed factory overhead.
Step 5: Assess qualitative factors ?
Step 6: Make decision ?
34
LO 3
SWASEY
SWASEY MANUFACTURING:
MANUFACTURING:
Relevant
Relevant Information
Information
Alternatives Differential
Make Buy Cost to Make
Equipment Rent $ 12,000 --- $ 12,000
Direct materials 5,000 --- 5,000
Direct labor 20,000 --- 20,000
Variable overhead 8,000 --- 8,000
Purchased cost --- $ 47,500 (47,500)
Receiving Dept labor --- 8,500 (8,500)
Total $ 45,000 $ 56,000 $ (11,000)
35
LO 3
SWASEY
SWASEY MANUFACTURING:
MANUFACTURING:
Make-or-Buy
Make-or-Buy Analysis
Analysis
Because
BecauseSwasey
SwaseyManufacturing
Manufacturingmustmusthire
hire
labor
laborto
tostaff
staffthe
theReceiving
Receivingdepartment,
department,
buying
buyingthe
thecomponent
componentwill willcost
cost$5.60
$5.60
per
perunit.
unit.Swasey
Swaseyshould
shouldproduce
producethethe
component
componentbecause
becausethethecomponent
component
requires
requires$4.50
$4.50in inrelevant
relevantproduction
production
costs
costsper
perunit.
unit.
36
LO 3
NORTON
NORTON MATERIALS:
MATERIALS: Keep-or-Drop
Keep-or-Drop
Background
Background
Norton
NortonMaterials
Materialsproduces
produces33products:
products:
blocks,
blocks,bricks,
bricks,and
andtile.
tile.The
Thetile
tilesegment
segment
has
hasaanegative
negativesegment
segmentmargin
marginand anddoes
does
not
notcontribute
contributeto
tocommon
commonfixed
fixed
expenses.
expenses.Should
ShouldNorton
Nortondrop
dropthethetile
tile
division?
division?
Continued
37
LO 3
NORTON
NORTON MATERIALS:
MATERIALS: Keep-or-Drop
Keep-or-Drop
Blocks Bricks Tiles Total
Sales $ 500 $ 800 $ 150 $ 1,450
Less Variable exp. 250 480 140 870
Contribution margin $ 250 $ 320 $ 10 $ 580
Less direct fixed exp
Advertising $ 10 $ 10 $ 10 $ 30
Salaries 37 40 35 112
Depreciation 53 40 10 103
Total $ 100 $ 90 $ 55 $ 245
Segment margin $ 150 $ 230 $ (45) $ 335
Less Common fixed exp 125
Operating income $ 210
Continued 38
LO 3
NORTON’S
NORTON’S TACTICAL
TACTICAL
MODEL:
MODEL: Make-or-Buy
Make-or-Buy
Step 1: Define the problem Tile division does not contribute to
common fixed expenses
Step 2: Identify alternatives 1. Keep division
2. Drop division
Step 3: Identify costs, benefits 1. Keep: saves $10,000 CM
2. Drop: eliminates $45,000
segment loss
Step 4: Total relevant costs & Should loss of other sales be
benefits considered?
Step 5: Assess qualitative factors
Step 6: Make decision
39
LO 3
NORTON:
NORTON: President’s
President’sAnalysis
Analysis (000)
(000)
Keep President’s
Keep Drop Difference analysis suggests
that Tile should
Sales $ 150 --- $ 150 be dropped.
Less Variable exp. 140 --- 140
Continued 40
LO 3
41
LO 3
NORTON:
NORTON: Marketing
Marketing Perspective
Perspective (000s)
(000s)
Marketing’s
Keep analysis suggests
Keep Drop Difference that Tile should
be kept.
Sales $ 1,450 $ 1,186.0 $ 264.0
Less Variable exp. 870 666.6 203.4
Continued 42
LO 3
43
LO 3
NORTON:
NORTON: Production
Production Perspective
Perspective (000s)
(000s)
Production’s
Drop & Keep replacement
Keep Replace Difference suggestion is not
as profitable as
Sales $ 1,450 $ 1,286.0 $ 264.0
keeping ceiling
Less Variable exp. 870 706.6 203.4 tiles.
Contribution margin $ 580 $ 579.4 $ 0.6
44
LO 3
NORTON
NORTON MATERIALS
MATERIALS :: Keep
Keep or
or Drop
Drop
Analysis
Analysis
Because
BecauseNorton
Nortonwill willlose
losesales
salesin
inboth
both
blocks
blocksand
andbrick
brickififceiling
ceilingtiles
tilesare
are
dropped
droppedandandreplacing
replacingceiling
ceilingtiles
tileswith
with
floor
floortiles
tilesisisless
lessprofitable,
profitable,the
thefirm
firmisis
better
betteroff
offto
tokeep
keepthe
theceiling
ceilingtile
tiledivision.
division.
45
LO 3
SPECIAL
SPECIAL ORDER:
ORDER: Definition
Definition
46
LO 3
ICE
ICE CREAM:
CREAM: Special
Special Order
Order Background
Background
An
Anice
icecream
creamcompany
companyisisoperating
operatingatat80%
80%
of
ofits
its20
20million
milliongallon
galloncapacity.
capacity.The
The
company
companyreceives
receivesan
anoffer
offerto
topurchase
purchase22
million
milliongallons
gallonsfor
for$1.55
$1.55per
pergallon.
gallon.This
This
isisbelow
belowthe
thewholesale
wholesaleprice
priceof
of$2.00.
$2.00.
Should
Shouldthe thecompany
companyaccept
acceptthe
theoffer?
offer?
Continued
47
LO 3
ICE
ICE CREAM
CREAM TACTICAL
TACTICAL
MODEL:
MODEL: Special
Special Order
Order
Step 1: Define the problem Is a special order profitable with
excess capacity?
48
LO 3
ICE
ICE CREAM:
CREAM: Special
Special Order
Order (000s)
(000s)
49
LO 3
ICE
ICE CREAM
CREAM :: Special
Special Order
Order Analysis
Analysis
Even
Eventhough
thoughthe
thespecial
specialorder
orderprice
pricefor
for22
million
milliongallons
gallonsofofice
icecream
creamisisbelow
belowthethe
normal
normalselling
sellingprice
priceofof$2.00,
$2.00,ititwill
willbe
be
profitable
profitablebecause
becausethere
thereisisspare
sparecapacity
capacity
and
andonly
onlyrelevant
relevantvariable
variablecosts
costsare
are
considered
consideredininthe
thedecision.
decision.
50
LO 3
JOINT
JOINT PRODUCTS:
PRODUCTS: Definition
Definition
51
LO 3
APPLETIME:
APPLETIME: Sell
Sell or
or Process
Process Background
Background
Appletime
Appletimegrows
growsandandsells
sellsapples
applesin ingrades
grades
A,
A,B, B,&&C.C.Grade
GradeBBapples
applesareareusually
usually
bagged
bagged& &sold.
sold.However,
However,aasupermarket
supermarket
isisoffering
offeringto
tobuy
buyapple
applepie
piefilling
fillingthat
that
Appletime
Appletimewould
wouldmake
makefromfromgrade
gradeBB
apples.
apples.Should
ShouldAppletime
Appletimeprocess
processgrade
grade
BBapples
applesinto
intoapple
applepie
piefilling?
filling?
Continued
52
LO 3
APPLETIME JOINT
PRODUCTION
EXHIBIT 12-3
53
LO 3
APPLETIME
APPLETIME TACTICAL
TACTICAL
MODEL:
MODEL: Process
Process Further
Further
Step 1: Define the problem Will it be profitable to process
grade B apples further?
54
LO 3
APPLETIME:
APPLETIME: Process
Process Further
Further
By processing
Process grade B apples into
Process Sell Difference pie filling, profit
will increase.
Sales $ 450 $ 150 $ 300
Processing cost 120 --- 120
55
LO 3
APPLETIME
APPLETIME :: Process
Process Further
FurtherAnalysis
Analysis
Even
Eventhough
thoughprocessing
processinggrade
gradeBBapples
apples
further
furtherincreases
increasescosts,
costs,there
thereisismore
more
profit
profitto
tobe
bemade
madefrom
frommaking
makingpiepiefilling
filling
than
thanfrom
fromselling
sellinggrade
gradeBBapples
applesbybythe
the
bag.
bag.
56
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
4
Choose the optimal
product mix when faced
with one constrained
resource.
57
LO 4
CONSTRAINTS:
CONSTRAINTS: Definition
Definition
58
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
5
Explain the impact of
cost on pricing
decisions.
59
LO 5
COST-BASED
COST-BASED PRICING:
PRICING:
Definition
Definition
60
LO 5
TARGET
TARGET COSTING
COSTING &
& PRICING:
PRICING:
Definition
Definition
61
LO 5
62
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
6
to find the optimal
solution to a problem of
multiple constrained
resources. (Appendix)
63
LO 6
LINEAR
LINEAR PROGRAMMING:
PROGRAMMING:
Definition
Definition
Is a mathematical method of
finding an optimal solution to a
production problem.
64
LO 6
GRAPHING SOLUTION
Linear programming
demonstrates the feasible
production region &
optimal solution for
complex problems.
EXHIBIT 12-4
65
CHAPTER 12
THE
THE END
END
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