Resume Ch 17

8/10/2019 Resume Ch 17

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17 -1

Tactical

Decision

Making

CHAPTER

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1. Describe the tactical decision-making model.

2. Explain how the activity resource usage model isused 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.

Objectives

After studying this

chapter, you should

be able to:

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6. Use linear programming to find the optimal

solution to a problem of multiple constrained

resources. (Appendix)

Objectives

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Model for Making Tactical Decisions

Step 1

Define the problem.

Increase capacity for warehousing and production.

Step 2

Identify the alternatives.

1. Build new facility

2. Lease larger facility, sublease current facility

3. Lease additional facility

4. Lease warehouse space

5. Buy shafts and bushings; free up needed space

Step 3

Step 4

Identify costs and benefits associated with each

feasible alternative.

Total relevant costs and benefits for each feasible

alternative.

Alternative 4:

Variable production costs $345,000

Warehouse lease 135,000

Alternative 5 :

Purchase price 460,000

Alternative 4 480,000

Alternative 5 460,000

Differential cost $20,000

step 5

Assess qualitative factors.

1. Quality of external supplier

2. Reliability of external supplier

3. Price stability

4. Labor relations and community image

Step 6

Make the decision

Continue to produce shafts and bushings internally;

lease warehouse

EXHIBIT 17.1

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Step 1. Recognize and define the problem.

Continued

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

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Lease warehouse space:Variable production costs $345,000


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.

Continued

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Step 4. Total the relevant costs and benefits for each

alternative.

Continued

Lease warehouse space:

Variable production costs $345,000


Total $480,000

Buy shafts and bushings externally:

Purchase price $460,000Differential cost $ 20,000

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Step 5. Assess qualitative factors.1. Quality of external suppliers

2. Reliability of external suppliers

3. Price stability4. 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

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Relevant Costs Defined

Relevant costs are future costs that differacross alternatives. A cost must not only

be a future cost but most also differ

between alternatives.

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Relevant Cost Illustrated

To illustrate the concept of relevant costs,

consider Tidwell’s make-or-buy alternatives.

We saw that the cost of direct labor used to

produce shafts and bushings is $150,000 peryear (based on normal volume).

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Illustration of an irrelevant Past Cost

Tidwell Products uses machinery to

manufacture shafts and bushings. This

machinery war purchased five years ago and

is being depreciated at an annual of $125,000.

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Illustration of an irrelevant Future Cost

Assume that the cost to lease the entire factory,

$340,000, is allocated to different production

departments including the department that produces

shafts and bushings, which receives $12,000 of the

cost. Is this $12,000 cost relevant to the make-or-buydecision facing Tidwell?

The example illustrates the importance of identifying

allocations of common fixed costs. Allocations of

common fixed costs can be safely classified as

irrelevant since any choice usually doesn’t affect the

level of cost. The only effect may be a reallocation

of those common fixed costs to fewer cost objects orse ments.

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17 -13 Cost to Make - Cost Not to Make Differential Cost

Direct Labor $ 150,000 $ 150,000

Depreciation 125,000

$ 125,000

Allocated Lease 12,000

12,000

$ 287,000

$137,000

$ 150,000

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Ethics in Tactical Decision Making

in tactical decision making, ethical concern revolve

around the way in which decisions are implemented

and the possible sacrifice of long-run objectives for

short-run gain. Relevant costs are used in makingtactical decision — decisions that have an immediate

view or limited objective in mine. However, decision

makers should always maintain an ethical

framework.

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F lexible resources can be easily

purchased in the amount neededand at the time of use… like

electricity.

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Committed resources are

purchased before they are used,such as salaried employees.

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Activity Resource Usage Model and

Assessing Relevancy

a. Demand Changes Relevant

Flexible Resources

b. Demand Constant Not Relevant

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Assessing Relevancy

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

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Assessing Relevancy

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

Resume Ch 17

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