Hansen-Mowen-Tactical Decision-Ch17
Hansen-Mowen-Tactical Decision-Ch17
Hansen-Mowen-Tactical Decision-Ch17
CHAPTER
Tactical
Decision
Making
17 -2
Objectives
Objectives
1. Describe theAfter
tactical decision-making
studying this model.
After studying this
2. Explain howchapter,
the activity
you resource usage
should
chapter, you should
model is used inbeassessing
able to:relevancy.
be able 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
Continued
Continued
17 -5
Continued
Continued
17 -6
Continued
Continued
17 -7
Relevant
Relevant Costs
Costs Defined
Defined
Relevant
Relevant costs
costs are
are future
future costs
costs that
that differ
differ
across
across alternatives.
alternatives. AAcost
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 ofof use…
use… like
like
electricity.
electricity.
17 -10
Committed
Committed resources
resources areare
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
Activity
Activity Resource
Resource Usage
Usage Model
Model and
and
Assessing
Assessing Relevancy
Relevancy
Committed
CommittedResources
Resources
(Short-Term)
(Short-Term)
Activity
Activity Resource
Resource Usage
Usage Model
Model and
and
Assessing
Assessing Relevancy
Relevancy
Committed
CommittedResources
Resources
(Multiperiod
(MultiperiodCapacity)
Capacity)
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-term Perspective
Perspective
17 -15
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 Swasey’s
specifications for $4.75 per unit.
17 -16
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 -17
Make
Make or
or Buy
Buy
The cost to make or buy 5,000 units follows:
Alternatives Differential
Make Buy Cost to Make
Rental of equipment $12,000 ------- $12,000
Direct materials 5,000 ------- 5,000
Direct labor 20,000 ------- 20,000
Variable overhead 8,000 ------- 8,000
Purchase cost ------- $47,500 -47,500
Receiving Dept. labor ------- 8,500 - 8,500
Total $45,000 $56,000 $-11,000
Make
Make
17 -18
Keep-or-Drop
Keep-or-Drop Decisions
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
Keep-or-Drop Decisions
Decisions
Differential
Sales Keep
$150 Drop
---- Amount
$150to Keep
Less: Variable expenses 140 ---- 140
Contribution margin $ 10 ---- $ 10
Less: Advertising -10 ---- -10
Cost of supervision -35 ---- -35
Total relevant benefit
(loss) $- 35 $ 0 $- 35
Preliminary
Preliminary figures
figures indicate
indicate that
that the
the tile
tile
segment
segment should
should be
be dropped!
dropped!
17 -20
Keep-or-Drop
Keep-or-Drop Decisions
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
Sales Keep
$1,450 Drop Amount
$1,186.0 to Keep
$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
Keeproofing
roofingtile
tilesegment!
segment!
17 -21
Keep-or-Drop
Keep-or-Drop Decisions
Decisions
Alternate
AlternateUse
Useof
ofFacilities
Facilities
Keep-or-Drop
Keep-or-Drop Decisions
Decisions
Alternate
AlternateUse
Useof
ofFacilities
Facilities
Special-Order
Special-Order Decisions
Decisions
Special-Order
Special-Order Decisions
Decisions
Variable costs:
Dairy ingredients $ 0.70
Sugar 0.10
Flavoring 0.15
Direct labor 0.25
Packaging 0.20
Commissions 0.02
Distribution 0.03
Other 0.05
Wholesale Total variable costs $ 1.50
price = Total fixed costs 0.097
$2.00 Total costs $1.597
17 -25
Special-Order
Special-Order Decisions
Decisions
Special-Order
Special-Order Decisions
Decisions
Variable costs:
Dairy ingredients $0.70
Sugar 0.10
Flavoring 0.15
Direct labor 0.25
Packaging 0.20
Commissions 0.02
Distribution 0.03
Other 0.05
Which costs Total variable costs $1.50$1.45
are irrelevant? Total fixed costs 0.097
Total costs $1.597
$1.45
17 -27
Special-Order
Special-Order Decisions
Decisions
Accept
Accept the
Variable the offer
offer ($0.10
costs: ($0.10 xx
2,000,000
2,000,000 == $200,000
$200,000
Dairy ingredients $ 0.70
Sugar more
0.10profit).
more profit).
Flavoring 0.15
Direct labor 0.25
Packaging 0.20
Commissions 0.02
Distribution 0.03
Other 0.05
Which costs Total variable costs $ $1.45
1.50
are irrelevant? Total fixed costs 0.097
Total cost $1.597
$1.45
17 -28
Bagged
Joint Cost
Grade B 120 Bags
$300
600 lb Cost $0.05/Bag
Sell for $1.30/Bag
Applesauce
Grade C 500 16-oz Cans
600 lb Cost $0.10/lb
Sell for $0.75 can
17 -29
Further
Further process!
process!
17 -30
Two Approaches to Pricing
1. Cost-Based Pricing
2. Target Costing and
Pricing
17 -31
Cost-Based Pricing
Revenues $856,500
Cost of goods sold:
Direct materials $489,750
Direct labor 140,000
Overhead 84,000 713,750
Gross profit $142,750
Selling and administrative expenses 25,000
Operating income $117,750
17 -32
Determining Markup Percentages
Markup on COGS =
(S & A expenses + Operating income) ÷ COGS
= ($25,000 + $117,750) ÷ $713,750
= 0.20
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 doesn’t
doesn’t
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
70 – 2X + 0.5Y 40,000
65 –
60 – Demand Constraint
55 – X 15,000
50 –
45 –
E D
40 –
35 – Demand Constraint
30 – Y 40,000
25 –
C
20 – Feasibility
15 – Region
10 –
5–
0–
A | | |B | |
5 10 15 20 25
17 -39
Linear
Linear Programming
Programming
Corner Point X-Value Y-Value Z = $25X + $10Y
A 0 0 $ 0
B 15 0 375
C 15 20 575
D 10 40 650
E 0 40 400
Chapter Seventeen
The
The End
End
17 -41