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8/10/2019 Resume Ch 17
http://slidepdf.com/reader/full/resume-ch-17 1/19
17 -1
Tactical
Decision
Making
CHAPTER
8/10/2019 Resume Ch 17
http://slidepdf.com/reader/full/resume-ch-17 2/19
17 -2
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:
8/10/2019 Resume Ch 17
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17 -3
6. Use linear programming to find the optimal
solution to a problem of multiple constrained
resources. (Appendix)
Objectives
8/10/2019 Resume Ch 17
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17 -4
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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17 -5
Model for Making Tactical Decisions
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
8/10/2019 Resume Ch 17
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17 -6
Model for Making Tactical Decisions
Lease warehouse space:Variable production costs $345,000
Warehouse lease 135,000
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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17 -7
Model for Making Tactical Decisions
Step 4. Total the relevant costs and benefits for each
alternative.
Continued
Lease warehouse space:
Variable production costs $345,000
Warehouse lease 135,000
Total $480,000
Buy shafts and bushings externally:
Purchase price $460,000Differential cost $ 20,000
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17 -8
Model for Making Tactical Decisions
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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17 -9
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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17 -10
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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17 -11
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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17 -12
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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17 -14
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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17 -15
F lexible resources can be easily
purchased in the amount neededand at the time of use… like
electricity.
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17 -16
Committed resources are
purchased before they are used,such as salaried employees.
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17 -17
Activity Resource Usage Model and
Assessing Relevancy
a. Demand Changes Relevant
Flexible Resources
b. Demand Constant Not Relevant
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17 -18
Activity Resource Usage Model and
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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17 -19
Activity Resource Usage Model and
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