Presentation on theme: "Tactical Decision Making"— Presentation transcript:
1 Tactical Decision Making CHAPTERTactical Decision Making
2 After studying this chapter, you should be able to: Objectives1. 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.After studying this chapter, you should be able to:
3 Objectives6. Use linear programming to find the optimal solution to a problem of multiple constrained resources. (Appendix)
4 Model for Making Tactical Decisions Step 1. Recognize and define the problem.Increase capacity for warehousing and production.Step 2. Identify alternatives as possible solutions to the problem; eliminate alternatives that are clearly not feasible.Build new facilityLease larger facility; sublease current facilityLease additional facilityLease warehouse spaceBuy shafts and brushings; free up needed spaceContinued
5 Model for Making Tactical Decisions 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.Lease warehouse space:Variable production costs $345,000Warehouse lease 135,000Buy shafts and bushings externally:Purchase price $460,000Continued
6 Model for Making Tactical Decisions Step 4. Total the relevant costs and benefits for each alternative.Lease warehouse space:Variable production costs $345,000Warehouse lease ,000Total $480,000Buy shafts and bushings externally:Purchase price $460,000Differential cost $ 20,000Continued
7 Model for Making Tactical Decisions Step 5. Assess qualitative factors.Quality of shafts and brushing is significantly lowerQuality of external suppliersReliability of external suppliersPrice stabilityLabor relations and community imageNot reliableStep 6. Make the decision.Continue to produce shafts and bushings internally; lease warehouse
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 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 Flexible Resourcesa. Demand ChangesRelevantb. Demand Constant Not Relevant
13 Supply – Demand = Unused Capacity Activity Resource Usage Model and Assessing RelevancyCommitted Resources(Multiperiod Capacity)Supply – Demand = Unused Capacitya.. Demand Increased < Unused Capacity Not relevantb. Demand Decreased (Permanent) Relevantc. Demand Increase > Unused Capacity Capital Decision
14 Illustrative Examples of Relevant Cost Applications Make or BuyKeep or DropSpecial OrderSell or Process FurtherProduct MixImportant: Short-term Perspective
15 Make or BuySwasey 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 Enough material is on hand to make 5,000 parts. Make or BuyThe full absorption cost for the 10,000 parts is computed as follows:Total Cost Unit CostRental of equipment $12,000 $1.20Equipment depreciation 2,Direct materials 10,Direct labor 20,Variable overhead 8,General fixed overhead 30,Total $82,000 $8.20Enough material is on hand to make 5,000 parts.
17 Make or Buy The cost to make or buy 5,000 units follows: Alternatives DifferentialMake Buy Cost to MakeRental of equipment $12, $12,000Direct materials 5, ,000Direct labor 20, ,000Variable overhead 8, ,000Purchase cost $47, ,500Receiving Dept. labor , ,500Total $45,000 $56,000 $-11,000Make
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 TotalSales revenue $500 $800 $150 $1,450Less: Variable expensesContribution margin $250 $320 $ 30 $ 580Less direct fixed expenses: Advertising $ 10 $ 10 $ 10 $SalariesDepreciation Total $100 $ 90 $ 55 $ 245Segment margin $150 $230 $- 45 $ 335Less: Common fixed expOperating income $ 210
19 Keep-or-Drop Decisions DifferentialKeep Drop Amount to KeepSales $ $150Less: Variable expensesContribution margin $ $ 10Less: AdvertisingCost of supervisionTotal relevant benefit(loss) $- 35 $ 0 $- 35Preliminary 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:DifferentialKeep Drop Amount to KeepSales $1,450 $1,186.0 $264.0Less: Variable expensesContribution margin $ $ $ 60.6Less: AdvertisingCost of supervisionTotal $ $ $ 15.6Keep roofing tile segment!
21 Alternate Use of Facilities Keep-or-Drop DecisionsAlternate Use of FacilitiesThe 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 $100,000Less: Variable expenses ,000Contribution margin $ 60,000Less: Direct fixed expenses ,000Segment margin $ 5,000
22 Alternate Use of Facilities Keep-or-Drop DecisionsAlternate Use of FacilitiesDrop and DifferentialKeep Replace Amount to KeepSales $1,450 $1, $164.00Less: Variable expensesContribution margin $ $ $$1,450 – $ –$50 – $64 + $100$870 – $140 – $25 – $ $40Decision: 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.
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.
27 Special-Order Decisions Accept the offer ($0.10 x 2,000,000 = $200,000 more profit).Variable costs:Dairy ingredients $ 0.70Sugar 0.10Flavoring 0.15Direct labor 0.25Packaging 0.20Commissions 0.02Distribution 0.03Other 0.05Total variable costs $ 1.50Which costs are irrelevant?$1.45Total fixed costsTotal cost $1.597
28 Sell or Further Process Yield at Split-OffFurther ProcessingGrade A800 lbSell for $0.40 lbBagged120 BagsCost $0.05/BagSell for $1.30/BagJoint Cost $300Grade B600 lbApplesauceoz CansCost $0.10/lbSell for $0.75 canGrade C600 lb
29 Sell or Further Process Process Differential AmountFurther Sell to Process FurtherRevenues $450 $150 $300Processing costTotal $330 $150 $180Further process!
30 Two Approaches to Pricing 1. Cost-Based Pricing2. Target Costing and Pricing
31 Cost-Based Pricing Revenues $856,500 Cost of goods sold: Direct materials $489,750Direct labor 140,000Overhead , ,750Gross profit $142,750Selling and administrative expenses ,000Operating income $117,750
32 Determining Markup Percentages Markup on COGS =(S & A expenses + Operating income) ÷ COGS= ($25,000 + $117,750) ÷ $713,750= 0.20Markup 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.) $100,000Direct labor (100 x 6 hours x $15) 9,000Overhead (60 percent of direct labor cost) ,400Estimated cost of goods sold $114,400Plus 20 percent markup of COGS ,880Bid 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 ProgrammingThe 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 $10YTwo 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 Subject to: 2X + 0.5Y 40,000