CHAPTER
17 -2
Objectives
1. Describe theAfter studying this tactical decision-making model. 2. Explain how the activity should usage chapter, you resource model is used inbe able to:relevancy. assessing 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
17 -5
17 -6
17 -7
17 -8
17 -9
Flexible resources can be easily purchased in the amount needed and at the time of use like electricity.
17 -10
Committed resources are purchased before they are used, such as salaried employees.
17 -11
a. Demand Changes
b. Demand Constant
17 -12
17 -13
17 -14
Keep or Drop
Special Order
17 -15
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 Swaseys 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 Direct materials Direct labor Variable overhead Purchase cost Receiving Dept. labor Total $12,000 5,000 20,000 8,000 ------------$45,000 Make ------------------------$47,500 8,500 $56,000 $12,000 5,000 20,000 8,000 -47,500 - 8,500 $-11,000
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
Keep Sales $150 Less: Variable expenses 140 Contribution margin $ 10 Less: Advertising -10 Cost of supervision -35 Total relevant benefit (loss) $- 35 Drop ---------------$ 0 Differential Amount to Keep $150 140 $ 10 -10 -35 $- 35
17 -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: 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 roofing tile segment!
17 -21
Keep-or-Drop Decisions
Alternate Use of Facilities 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:
Sales Less: Variable expenses Contribution margin Less: Direct fixed expenses Segment margin
17 -22
Keep-or-Drop Decisions
Alternate Use of Facilities Drop and Differential Keep Replace Amount to Keep Sales $1,450 $1,286.00 $164.00 Less: Variable expenses 870 706.60 163.40 Contribution margin $ 580 $ 579.40 $1,450 $150 $ 0.60 $50 $64 $870 $140+ $100 $25 $38.40 + Decision: Continue making roof tile! $40
17 -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.
17 -24
Special-Order Decisions
Variable costs: Dairy ingredients Sugar Flavoring Direct labor Packaging Commissions Distribution Other Total variable costs Total fixed costs Total costs $ 0.70 0.10 0.15 0.25 0.20 0.02 0.03 0.05 $ 1.50 0.097 $1.597
17 -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.
17 -26
Special-Order Decisions
Variable costs: Dairy ingredients Sugar Flavoring Direct labor Packaging Commissions Distribution Other Total variable costs Total fixed costs Total costs $0.70 0.10 0.15 0.25 0.20 0.02 0.03 0.05 $1.50 $1.45 0.097 $1.45 $1.597
17 -27
Special-Order Decisions
Accept costs: Variable the offer ($0.10 x 2,000,000 = $200,000 Dairy ingredients more profit). Sugar Flavoring Direct labor Packaging Commissions Distribution Other Total variable costs Total fixed costs Total cost $ 0.70 0.10 0.15 0.25 0.20 0.02 0.03 0.05 $$1.45 1.50 0.097 $1.45 $1.597
17 -28
Grade B 600 lb
Grade C 600 lb
17 -29
Further process!
17 -30
Cost-Based Pricing
Revenues Cost of goods sold: Direct materials Direct labor Overhead Gross profit Selling and administrative expenses Operating income $856,500 $489,750 140,000 84,000
17 -31
17 -32
17 -33
17 -34
17 -35
17 -36
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
17 -37
Linear Programming
Max. Z = $25X x $10Y Subject to: 2X + 0.5Y 40,000 X 15,000 Y 40,000 X0 Y0
17 -38
80 75 Machine Hours Constraint 2X + 0.5Y 40,000 70 65 60 Demand Constraint 55 X 15,000 50 45 E D 40 Demand Constraint 35 Y 40,000 30 25 C 20 Feasibility 15 Region 10 5 B A | | | | | 0 5 10 15 20 25
17 -39
Linear Programming
Corner Point
A B C D E
X-Value
0 15 15 10 0
Y-Value
0 0 20 40 40
Z = $25X + $10Y
$ 0 375 575 650 400
17 -40
Chapter Seventeen
The End
17 -41