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17 -1 Tactical Decision Making CHAPTER. 17 -2 1.Describe the tactical decision-making model. 2.Explain how the activity resource usage model is used in.

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Presentation on theme: "17 -1 Tactical Decision Making CHAPTER. 17 -2 1.Describe the tactical decision-making model. 2.Explain how the activity resource usage model is used in."— Presentation transcript:

1 17 -1 Tactical Decision Making CHAPTER

2 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. 4.Choose the optimal product mix when faced with one constrained resource. 5.Explain the impact of cost of pricing decisions. ObjectivesObjectives After studying this chapter, you should be able to:

3 Use linear programming to find the optimal solution to a problem of multiple constrained resources. (Appendix) ObjectivesObjectives

4 17 -4 Model for Making Tactical Decisions Step 1. Recognize and define the problem. ContinuedContinued Increase capacity for warehousing and production. Step 2.Identify alternatives as possible solutions to the problem; eliminate alternatives that are clearly not feasible. 1.Build new facility 2.Lease larger facility; sublease current facility 3.Lease additional facility 4.Lease warehouse space 5.Buy shafts and brushings; free up needed space

5 17 -5 Model for Making Tactical Decisions Lease warehouse space: Variable production costs$345,000 Warehouse lease135,000 Buy shafts and bushings externally: Purchase price$460,000 Step 3.Identify the costs and benefits associated with each feasible alternative. Classify costs and benefits as relevant or irrelevant, and eliminate irrelevant ones from consideration. ContinuedContinued

6 17 -6 Model for Making Tactical Decisions Step 4.Total the relevant costs and benefits for each alternative. ContinuedContinued Lease warehouse space: Variable production costs$345,000 Warehouse lease 135,000 Total$480,000 Buy shafts and bushings externally: Purchase price$460,000 Differential cost$ 20,000

7 17 -7 Model for Making Tactical Decisions Step 5.Assess qualitative factors. 1.Quality of external suppliers 2.Reliability of external suppliers 3.Price stability 4.Labor relations and community image Step 6. Make the decision. Quality of shafts and brushing is significantly lower Not reliable Continue to produce shafts and bushings internally; lease warehouse

8 17 -8 Relevant Costs Defined Relevant costs are future costs that differ across alternatives. A cost must not only be a future cost but most also differ between alternatives.

9 17 -9 Flexible resources can be easily purchased in the amount needed and at the time of use… like electricity.

10 Committed resources are purchased before they are used, such as salaried employees.

11 Activity Resource Usage Model and Assessing Relevancy a. Demand Changes Relevant Flexible Resources b. Demand Constant Not Relevant

12 Activity Resource Usage Model and Assessing Relevancy Committed Resources (Short-Term) Committed Resources (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

13 Activity Resource Usage Model and Assessing Relevancy Committed Resources (Multiperiod Capacity) Committed Resources (Multiperiod Capacity) Supply – Demand = Unused Capacity a.. Demand Increased < Unused Capacity Not relevant b. Demand Decreased (Permanent) Relevant c. Demand Increase > Unused Capacity Capital Decision

14 Important: Short-term Perspective Illustrative Examples of Relevant Cost Applications Make or Buy Keep or Drop Special Order Sell or Process Further Product Mix

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 Swasey’s specifications for $4.75 per unit.

16 Make or Buy Total Cost Unit Cost Rental of equipment$12,000$1.20 Equipment depreciation2, Direct materials10, Direct labor20, Variable overhead8, General fixed overhead 30, Total$82,000$8.20 The full absorption cost for the 10,000 parts is computed as follows: Enough material is on hand to make 5,000 parts.

17 Make or Buy Alternatives Differential Make Buy Cost to Make Rental of equipment$12, $12,000 Direct materials5, ,000 Direct labor20, ,000 Variable overhead8, ,000 Purchase cost $47,500-47,500 Receiving Dept. labor , ,500 Total$45,000$56,000$-11,000 The cost to make or buy 5,000 units follows: Make

18 Norton Materials, Inc. produces concrete blocks, bricks, and roofing tile. The controller prepared the following income statements: Keep-or-Drop Decisions Blocks Bricks Tile Total Sales revenue$500$800$150$1,450 Less: Variable expenses Contribution margin$250$320$ 30$ 580 Less direct fixed expenses: Advertising$ 10$ 10$ 10$ 30 Salaries Depreciation Total$100$ 90$ 55$ 245 Segment margin$150$230$- 45$ 335 Less: Common fixed exp. 125 Operating income$ 210

19 Keep-or-Drop Decisions Differential Keep Drop Amount to Keep Sales$ $150 Less: Variable expenses Contribution margin$ $ 10 Less: Advertising Cost of supervision Total relevant benefit (loss) $- 35$ 0$- 35 Preliminary figures indicate that the tile segment should be dropped!

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: Sales$1,450$1,186.0$264.0 Less: Variable expenses Contribution margin$ 580$ 519.4$ 60.6 Less: Advertising Cost of supervision Total$ 438$ 422.4$ 15.6 Differential Keep Drop Amount to Keep Keep roofing tile segment!

21 Keep-or-Drop Decisions 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: Alternate Use of Facilities Sales$100,000 Less: Variable expenses 40,000 Contribution margin$ 60,000 Less: Direct fixed expenses 55,000 Segment margin$ 5,000

22 Keep-or-Drop Decisions Alternate Use of Facilities Drop and Differential Keep Replace Amount to Keep Sales$1,450$1,286.00$ Less: Variable expenses Contribution margin$ 580$ $ 0.60 $1,450 – $150 –$50 – $64 + $100 $870 – $140 – $25 – $ $40 Decision: Continue making roof tile!

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.

24 Special-Order Decisions Variable costs: Dairy ingredients$ 0.70 Sugar0.10 Flavoring0.15 Direct labor0.25 Packaging0.20 Commissions0.02 Distribution0.03 Other 0.05 Total variable costs$ 1.50 Wholesale price = $2.00 Total fixed costs Total costs $1.597

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.

26 Special-Order Decisions Variable costs: Dairy ingredients$0.70 Sugar0.10 Flavoring0.15 Direct labor0.25 Packaging0.20 Commissions0.02 Distribution0.03 Other0.05 Total variable costs$1.50 Total fixed costs Total costs $1.597 Which costs are irrelevant? $1.45 $1.45

27 Special-Order Decisions Variable costs: Dairy ingredients$ 0.70 Sugar0.10 Flavoring0.15 Direct labor0.25 Packaging0.20 Commissions0.02 Distribution0.03 Other0.05 Total variable costs $ 1.50 Total fixed costs Total cost $1.597 Which costs are irrelevant? $1.45 $1.45 Accept the offer ($0.10 x 2,000,000 = $200,000 more profit).

28 Sell or Further Process Yield at Split-Off Grade A 800 lb Sell for $0.40 lb Grade B 600 lb Grade C 600 lb Joint Cost $300 Bagged 120 Bags Cost $0.05/Bag Sell for $1.30/Bag Applesauce oz Cans Cost $0.10/lb Sell for $0.75 can Further Processing

29 Sell or Further Process Process Differential Amount Further Sell to Process Further Revenues$450$150$300 Processing cost Total$330$150$180 Further process!

30 Two Approaches to Pricing 1. Cost-Based Pricing 2.Target Costing and Pricing

31 Revenues$856,500 Cost of goods sold: Direct materials$489,750 Direct labor140,000 Overhead 84, ,750 Gross profit$142,750 Selling and administrative expenses 25,000 Operating income$117,750 Cost-Based Pricing

32 Markup on COGS= (S & A expenses + Operating income) ÷ COGS = ($25,000 + $117,750) ÷ $713,750 = 0.20 Determining Markup Percentages Markup on direct materials = (DL + OH + S & A expenses + Oper. income) ÷ Direct mater. = ($140,000 + $84,000 + $25,000 + $117,750) ÷$489,750 = 0.749

33 Determining Markup Percentages Direct materials (computer components, etc.)$100,000 Direct labor (100 x 6 hours x $15)9,000 Overhead (60 percent of direct labor cost) 5,400 Estimated cost of goods sold$114,400 Plus 20 percent markup of COGS 22,880 Bid price$137,280

34 Target Costing and Pricing Target costing is a method of determining the cost of a product or service based on the price (target price) that customers are willing to pay. This is referred to as price-driven costing.

35 Legal Aspects of 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 Robinson-Patman Act is the most potent weapon against price discrimination, but it doesn’t cover services and intangibles.

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

37 Linear Programming Max. Z = $25X x $10Y 2X + 0.5Y  40,000 X  15,000 Y  40,000 X  0 Y  0 Subject to:

38 – 75 – 70 – 65 – 60 – 55 – 50 – 45 – 40 – 35 – 30 – 25 – 20 – 15 – 10 – 5 – 0 – | | | | | Machine Hours Constraint 2X + 0.5Y  40,000 Demand Constraint X  15,000 Demand Constraint Y  40,000 Feasibility Region A B C DE

39 Linear Programming Corner Point X-Value Y-Value Z = $25X + $10Y A00$ 0 B C D E Manufacture 10,000 units of Gear X and 40,000 of Gear Y.

40 The End Chapter Seventeen

41 17 -41


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