Libby, Libby and Short1. 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.
Objectives
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6. Use linear programming to find the optimal solution to a problem of multiple constrained resources. (Appendix)
Objectives
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.
Build new facility
Lease additional facility
Lease warehouse space
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Lease warehouse space:
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
Model for Making Tactical Decisions
Step 4. Total the relevant costs and benefits for each alternative.
Continued
Purchase price $460,000
Differential cost $ 20,000
Quality of external suppliers
Reliability of external suppliers
Continue to produce shafts and bushings internally; lease warehouse
Quality of shafts and brushing is significantly lower
Not reliable
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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.
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Flexible resources can be easily purchased in the amount needed and 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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Flexible Resources
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Committed Resources
b. Demand Increased > Unused Capacity Relevant
Activity Capacity Reduced Relevant
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Committed Resources
(Multiperiod Capacity)
b. Demand Decreased (Permanent) Relevant
c. Demand Increase > Unused Capacity Capital Decision
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Make or Buy
Keep or Drop
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.
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Equipment depreciation 2,000 0.20
Direct materials 10,000 1.00
Direct labor 20,000 2.00
Variable overhead 8,000 0.80
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.
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Direct materials 5,000 ------- 5,000
Direct labor 20,000 ------- 20,000
Variable overhead 8,000 ------- 8,000
Purchase cost ------- $47,500 -47,500
Total $45,000 $56,000 $-11,000
Make
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Norton Materials, Inc. produces concrete blocks, bricks, and roofing tile. The controller prepared the following income statements:
Keep-or-Drop Decisions
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
Sales $150 ---- $150
Contribution margin $ 10 ---- $ 10
Less: Advertising -10 ---- -10
Total relevant benefit
Preliminary figures indicate that the tile segment should be dropped!
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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
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 roofing tile segment!
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
Segment margin $ 5,000
Sales $1,450 $1,286.00 $164.00
Contribution margin $ 580 $ 579.40 $ 0.60
$1,450 – $150 –$50 – $64 + $100
$870 – $140 – $25 – $38.40 + $40
Decision: Continue making roof tile!
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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.
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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.
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$1.45
$1.45
Revenues $450 $150 $300
Processing cost 120 ---- 120
Total $330 $150 $180
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Operating income $117,750
= ($25,000 + $117,750) ÷ $713,750
($140,000 + $84,000 + $25,000 + $117,750) ÷$489,750 = 0.749
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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
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.
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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.
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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
2X + 0.5Y 40,000
| | | | |
A 0 0 $ 0
B 15 0 375
C 15 20 575
D 10 40 650
E 0 40 400
Manufacture 10,000 units of Gear X and 40,000 of Gear Y.
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