CHAPTER 12TACTICAL DECISION MAKING
QUESTIONS FOR WRITING AND DISCUSSION
A tactical decision is short-run in nature; itinvolves choosing among alternatives withan immediate or limited end in view. A stra-tegic decision involves selecting strategiesthat yield a long-term competitive advan-tage.
Depreciation is an allocation of a sunk cost.This cost is a past cost and will never differ across alternatives.
The salary of a supervisor in an accept or reject decision is an example of an irrelevantfuture cost.
If one alternative is to be judged superior toanother alternative on the basis of cash-flowcomparisons, then cash flows must be ex-pressed as an annual amount (or periodicamount); otherwise, consideration must begiven to the time value of the nonperiodiccash flows.
Disagree. Qualitative factors also have animportant bearing on the decision and may,at times, overrule the quantitative evidencefrom a relevant costing analysis.
The purchase of equipment needed to pro-duce a special order is an example of a fixedcost that is relevant.
Relevant costs are those costs that differ across alternatives. Differential costs are thedifferences between the costs of two alter-natives.
Depreciation is a relevant cost whenever it isa future cost that differs across alternatives.Thus, it must involve a capital asset not yetacquired.
Past costs can be used as information tohelp predict future costs.
Yes. Suppose, for example, that sufficientmaterials are on hand for producing a partfor two years. After two years, the part willbe replaced by a newly engineered part. If there is no alternative use of the materials,then the cost of the materials is a sunk costand not relevant in a make-or-buy decision.
Complementary effects may make it moreexpensive to drop a product, as the droppedproduct has a negative impact on other products.
A manager can identify alternatives by usinghis or her own knowledge and experienceand by obtaining input from others who arefamiliar with the problem.
No. Joint costs are irrelevant. They occur regardless of whether the product is sold atthe split-off point or processed further.
Yes. The incremental revenue is $1,400,and the incremental cost is only $1,000,creating a net benefit of $400.
Regardless of how many units are pro-duced, fixed costs remain the same. Thus,fixed costs do not change as product mixchanges.
No. If a scarce resource is used in producingthe two products, then the product providingthe greatest contribution per unit of scarceresource should be selected. For more thanone scarce resource, linear programmingmay be used to select the optimal mix.
If a firm is operating below capacity, then aprice that is above variable costs will in-crease profits. A firm may sell a product be-low cost as a loss leader, hoping that manycustomers will purchase additional itemswith greater contribution margins. Grocerystores often use this strategy.
Different prices can be quoted to customersin markets not normally served, to noncom-peting customers, and in a competitive bid-ding setting.
Linear programming is used to select theoptimal product mix whenever there are mul-tiple constrained scarce resources.
An objective function is the one to be max-imized (or minimized) subject to a set of constraints. A constraint restricts the possi-ble values of variables appearing in the ob- jective function. Usually, a constraint is con-