STUDENT EDITION

PowerPoint Presentation by
Gail B. Wright
Professor Emeritus of Accounting
Bryant University

Copyright 2007 Thomson South-Western, a part of The

Thomson Corporation. Thomson, the Star Logo, and
South-Western are trademarks used herein under license.

MANAGEMENT
ACCOUNTING
8th EDITION
BY
HANSEN & MOWEN

12 TACTICAL DECISION MAKING

1

LEARNING
LEARNING OBJECTIVES
OBJECTIVES
1. 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.
Continued
2

LEARNING
LEARNING OBJECTIVES
OBJECTIVES
4. Choose the optimal product mix when
faced with one constrained resource.
5. Explain the impact of cost on pricing
decisions.
6. Use linear programming to find the optimal
solution to a problem of multiple
constrained resources. (Appendix)
3

LO 1

TACTICAL
TACTICAL DECISION
DECISION MAKING:
MAKING:
Definition
Definition

Consists of choosing among

alternatives with an immediate
or limited end in view.

LO 1

STRATEGIC
STRATEGIC DECISION
DECISION MAKING:
MAKING:
Definition
Definition

Is selecting among alternative

strategies so that long term
competitive advantage is
established.

LO 1

TACTICAL MODEL
A general approach to tactical decision making
includes:
1. Recognize, define the problem
2. Identify alternatives, eliminating those that are
unfeasible
3. Identify costs & benefits
4. Total relevant costs, benefits of each
alternative
Assess qualitative
qualitativefactors
factors
5. Assess
6. Select alternative with greatest overall benefit
6

LO 1

TIDWELL
TIDWELL PRODUCTS:
PRODUCTS: Background
Background
Tidwell
TidwellProducts
ProductsInc.
Inc.isisfacing
facingexpanded
expanded
production
productionthat
thatisisstraining
strainingthe
thecapacity
capacityin
in
facilities
facilitieswith
with55years
yearsremaining
remainingon
ontheir
their
lease.
lease.Two
Twofeasible
feasiblealternatives
alternativesunder
under
consideration
considerationare
area)
a)to
torent
rentan
anadditional
additional
building
buildingfor
forwarehousing
warehousingand
andb)
b)outsource
outsource
production.
production.The
TheCFO
CFOwill
willprepare
prepareaareport
reportof
of
detailed
detailedcosts
costsfor
forthese
thesealternatives.
alternatives.
7

LO 1

APPLYING
APPLYING TACTICAL
TACTICAL MODEL
MODEL
Step 1: Define the problem

Increase capacity for warehousing

& production

Step 2: Identify alternatives

1.
2.
3.
4.
5.

Build new facility

Lease larger facility; sublease
current facility
Lease additional facility
Lease warehouse space
Buy shafts & bushings; free
up space

Continued
8

LO 1

APPLYING
APPLYING TACTICAL
TACTICAL MODEL
MODEL
Step 3: Identify costs, benefits

Alt 4: <Costs> + Benefits

Alt 5: <Costs> + Benefits

Step 4: Total relevant costs &

benefits

Alt 4: Relevant <Costs> + Benefits

Alt 5: Relevant <Costs> + Benefits
Differential cost

Step 5: Assess qualitative factors

1.
2.
3.
4.

Step 6: Make decision

Quality of external supplier

Reliability of external
supplier
Price stability
Labor relations & community
image

Continue producing & lease

warehouse

LO 1

RELEVANT
RELEVANT COSTS:
COSTS: Definition
Definition

Are future costs that differ

alternatives.
differacross
across
alternatives.

10

LO 1

RELEVANT VS. IRRELEVANT

COSTS
Cost to Make
Direct labor
Depreciation
Allocated lease

$ 150,000

Cost Not to
Make
---

Differential
Cost
$ 150,000

125,000

$ 125,000

---

12,000

12,000

---

$ 287,000

$ 137,000

$150,000

Direct labor is the relevant

cost because it differs between
alternatives.
11

LO 2

MANUFACTURING
MANUFACTURING FIRM:
FIRM:
Background
Background

AAmanufacturing
manufacturingfirm
firmemploys
employsfive
five(5)
(5)
engineers
engineerswith
withaacapacity
capacityof
of10,000
10,000
engineering
engineeringhours
hours(2,000
(2,000hours
hourseach)
each)atat
aacost
costof
of$250,000
$250,000($25
($25per
perhour).
hour).The
The
firm
firmexpects
expectsto
touse
useonly
only9,000
9,000
engineering
engineeringhours
hoursduring
duringthe
thecurrent
current
year,
year,producing
producingunused
unusedcapacity.
capacity.
12

LO 2

Should the firm consider

accepting a special order that
uses 500 engineering hours?

Yes. The firm should consider

accepting the special order, if it is
otherwise profitable, because it
will be completed with unused
engineering capacity.
13

LO 3

SWASEY
SWASEY MANUFACTURING
MANUFACTURING ::
Make-or-Buy
Make-or-Buy Background
Background

Swasey
SwaseyManufacturing,
Manufacturing,aaprinter
printer
manufacturer,
manufacturer,will
willswitch
switchto
toaaprinter
printerthat
that
does
doesnot
notuse
usean
anelectronic
electroniccomponent
componentitit
currently
currentlyproduces.
produces.Should
ShouldSwasey
Swasey
produce
produce10,000
10,000components
componentsfor
forthe
theolder
older
printer
printerthis
thisyear
yearor
orshould
shouldthey
theypurchase
purchase
the
thecomponent
componentfor
for$4.75?
$4.75?
Continued

14

LO 3

SWASEY
SWASEY MANUFACTURING:
MANUFACTURING:
Relevant
Relevant Information
Information
Alternatives
Make
Buy

Differential
Cost to Make

Equipment Rent

$ 12,000

---

$ 12,000

Direct materials

5,000

---

5,000

20,000

---

20,000

8,000

---

8,000

Direct labor
Variable overhead
Purchased cost

---

$ 47,500

(47,500)

Receiving Dept labor

---

8,500

(8,500)

$ 56,000

$ (11,000)

Total

$ 45,000

15

LO 3

NORTON
NORTON MATERIALS:
MATERIALS: Keep-or-Drop
Keep-or-Drop
Background
Background

Norton
NortonMaterials
Materialsproduces
produces33products:
products:
blocks,
blocks,bricks,
bricks,and
andtile.
tile.The
Thetile
tilesegment
segment
has
hasaanegative
negativesegment
segmentmargin
marginand
anddoes
does
not
notcontribute
contributeto
tocommon
commonfixed
fixed
expenses.
expenses.Should
ShouldNorton
Nortondrop
dropthe
thetile
tile
division?
division?
Continued
16

LO 3

NORTON
NORTON MATERIALS:
MATERIALS: Keep-or-Drop
Keep-or-Drop
Blocks
Sales

Tiles

Total

$ 500

$ 800

$ 150

$ 1,450

250

480

140

870

$ 250

$ 320

10

$ 580

10

Less Variable exp.

Contribution margin

Bricks

Less direct fixed exp

Advertising

10

10

30

Salaries

37

40

35

112

Depreciation

53

40

10

103

55

$ 245

$ (45)

$ 335

Total
Segment margin

$ 100

$ 150

$ 230

Less Common fixed exp

90

125

Operating income

$ 210
Continued

17

LO 3

NORTON
NORTON MATERIALS
MATERIALS :: Keep
Keep or
or Drop
Drop
Analysis
Analysis

Because
BecauseNorton
Nortonwill
willlose
losesales
salesin
inboth
both
blocks
blocksand
andbrick
brickififceiling
ceilingtiles
tilesare
are
dropped
droppedand
andreplacing
replacingceiling
ceilingtiles
tileswith
with
floor
floortiles
tilesisisless
lessprofitable,
profitable,the
thefirm
firmisis
better
betteroff
offto
tokeep
keepthe
theceiling
ceilingtile
tile
division.
division.
18

LO 3

ICE
ICE CREAM:
CREAM: Special
Special Order
Order Background
Background
An
Anice
icecream
creamcompany
companyisisoperating
operatingatat80%
80%
of
ofits
its20
20million
milliongallon
galloncapacity.
capacity.The
The
company
companyreceives
receivesan
anoffer
offerto
topurchase
purchase22
million
milliongallons
gallonsfor
for$1.55
$1.55per
pergallon.
gallon.This
This
isisbelow
belowthe
thewholesale
wholesaleprice
priceof
of$2.00.
$2.00.
Should
Shouldthe
thecompany
companyaccept
acceptthe
theoffer?
offer?
Continued
19

LO 3

ICE
ICE CREAM
CREAM :: Special
Special Order
Order Analysis
Analysis
Even
Eventhough
thoughthe
thespecial
specialorder
orderprice
pricefor
for22
million
milliongallons
gallonsof
ofice
icecream
creamisisbelow
belowthe
the
normal
normalselling
sellingprice
priceof
of$2.00,
$2.00,ititwill
willbe
be
profitable
profitablebecause
becausethere
thereisisspare
sparecapacity
capacity
and
andonly
onlyrelevant
relevantvariable
variablecosts
costsare
are
considered
consideredin
inthe
thedecision.
decision.
20

LO 3

JOINT
JOINT PRODUCTS:
PRODUCTS: Definition
Definition

Have common processes &

cost
ofof
production
cost
production up to a
split-off point.

21

LO 3

APPLETIME JOINT
PRODUCTION

EXHIBIT 12-3
22

LO 3

APPLETIME
APPLETIME :: Process
Process Further
Further Analysis
Analysis
Even
Eventhough
thoughprocessing
processinggrade
gradeBBapples
apples
further
furtherincreases
increasescosts,
costs,there
thereisismore
more
profit
profitto
tobe
bemade
madefrom
frommaking
makingpie
piefilling
filling
than
thanfrom
fromselling
sellinggrade
gradeBBapples
applesby
bythe
the
bag.
bag.

23

LO 4

CONSTRAINTS:
CONSTRAINTS: Definition
Definition

Are limitations a business

faces such as limited
resources or demand.

24

LO 5

PRICING: Legal Aspects

Predatory pricing
A means of setting price to eliminate competition
Dumping on international market

Price discrimination
Charging different prices to different customers

Price gouging
Using market power to set prices too high

25

LO 6

GRAPHING SOLUTION
Linear programming
demonstrates the feasible
production region &
optimal solution for
complex problems.

EXHIBIT 12-4
26

CHAPTER 12

THE
THE END
END

27