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CHAPTER
Tactical
Decision
Making
17 -2
Objectives
1. Describe theAfter
tactical
decision-making
model.
studying
this
2. Explain howchapter,
the activity
resource usage
you should
model is used inbe
assessing
able to:relevancy.
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
6. Use linear programming to find the optimal
solution to a problem of multiple constrained
resources. (Appendix)
17 -4
17 -5
$345,000
135,000
$460,000
17 -6
17 -7
17 -8
17 -9
17 -10
17 -11
a. Demand Changes
Relevant
b. Demand Constant
Not Relevant
17 -12
Relevant
Not Relevant
17 -13
Capital Decision
Illustrative Examples of
Relevant Cost Applications
Make or Buy
Keep or Drop
Special Order
17 -14
17 -15
Make or 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 -16
Make or 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 -17
Make or Buy
The cost to make or buy 5,000 units follows:
Alternatives
Differential
Make
Buy Cost to Make
Rental of equipment
Direct materials
Direct labor
Variable overhead
Purchase cost
Receiving Dept. labor
Total
$12,000
5,000
20,000
8,000
------------$45,000
Make
------------------------$47,500
8,500
$56,000
$12,000
5,000
20,000
8,000
-47,500
- 8,500
$-11,000
17 -18
Keep-or-Drop Decisions
Norton Materials, Inc. produces concrete blocks, bricks, and roofing
tile. The controller prepared the following income statements:
Blocks Bricks Tile
Total
Sales revenue
$500
$800 $150 $1,450
Less: Variable expenses
250
480
140
870
Contribution margin
$250
$320 $ 30 $ 580
Less direct fixed expenses:
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
17 -19
Keep-or-Drop Decisions
Keep
Sales
$150
Less: Variable expenses 140
Contribution margin
$ 10
Less: Advertising
-10
Cost of supervision -35
Total relevant benefit
(loss)
$- 35
Drop
---------------$ 0
Differential
Amount to Keep
$150
140
$ 10
-10
-35
$- 35
17 -20
Keep-or-Drop Decisions
Tom Blackburn determines that dropping the tile section will
reduce sales in all sections as follows: $50,000 for blocks,
$64,000 for bricks, and $150,000 for roofing tile. His
summary in thousands is shown below:
Differential
Keep
Drop Amount to Keep
Sales
$1,450 $1,186.0
$264.0
Less: Variable expenses
870
666.6
203.4
Contribution margin
$ 580 $ 519.4
$ 60.6
Less: Advertising
-30
-20.0
-10.0
Cost of supervision -112
-77.0
-35.0
Total
$ 438 $ 422.4
$ 15.6
Keep roofing tile segment!
17 -21
Keep-or-Drop Decisions
Alternate Use of 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 -22
Keep-or-Drop Decisions
Alternate Use of Facilities
Drop and
Differential
Keep Replace Amount to Keep
Sales
$1,450 $1,286.00
$164.00
Less: Variable expenses
870
706.60
163.40
Contribution margin $ 580$1,450
$ 579.40
$150 $ 0.60
$50 $140
$64 +
$870
$25 $100
$38.40 +
Decision: Continue making
roof tile!
$40
17 -23
Special-Order 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 -24
Special-Order 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 -25
Special-Order Decisions
An ice cream distributor from a
geographic region not normally
served by the company has offered
to buy two million units at $1.55 per
unit, provided its own label can be
attached to the product. The
distributor has agreed to pay the
transportation cost.
17 -26
Special-Order 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
17 -27
Special-Order Decisions
Which costs
are irrelevant?
Accept the
offer ($0.10 x
Variable
costs:
2,000,000
= $200,000
Dairy ingredients
more 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 -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 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
17 -36
Linear 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 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
B
A |
|
|
|
|
0
5
10
15
20
25
17 -39
Linear 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 End
17 -41