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CHAPTER
Tactical
Decision
Making
17 -2
Objectives
1. Describe theAfter
tactical decision-making
studying this model.
2. Explain howchapter,
the activity resource usage
you should
model is used inbeassessing
able to: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.
17 -3
Objectives
6. Use linear programming to find the optimal
solution to a problem of multiple constrained
resources. (Appendix)
17 -4
Continued
17 -5
Continued
17 -6
Continued
17 -7
Flexible Resources
Illustrative Examples of
Relevant Cost Applications
Make or Buy
Keep or Drop
Special Order
Product Mix
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.
17 -16
Make or 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 or 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
17 -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 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 Decisions
Differential
Keep Drop Amount to Keep
Sales $150 ---- $150
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
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:
Differential
Keep Drop Amount to Keep
Sales $1,450 $1,186.0 $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-or-Drop Decisions
Alternate Use of Facilities
Keep-or-Drop Decisions
Alternate Use of Facilities
Special-Order Decisions
Special-Order 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 Decisions
Special-Order 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 Decisions
Accept the
Variable offer ($0.10 x
costs:
2,000,000 = $200,000
Dairy ingredients $ 0.70
Sugarmore profit). 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 $$1.45
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 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
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
17 -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
17 -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.
Linear Programming
2X + 0.5Y 40,000
17 -37
Linear Programming
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–
A | | B
| | |
0–
5 10 15 20 25
17 -39
Linear Programming
Chapter Seventeen
The End
17 -41