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H M Ch18 Tactical Decision
H M Ch18 Tactical Decision
Chapter 18
Activity Resource Usage Model
and Tactical Decision Making
3
Tactical Decision Making
Continued from previous slide
4. Compare the relevant costs and benefits for
each alternative, and then relate each
alternative to the overall strategic goals of the
firm and other important qualitative factors.
5. Select the alternative with the greatest benefit
which also supports the organization’s
strategic objectives.
4
Tactical Decision Making
Step 1: Define the Problem
5
Tactical Decision Making
Step 2: Identify Feasible Alternatives
• Sell the apples to pig farmers.
– Eliminate: not enough local farmers
• Bag the apples in five-pound bags and sell them to local
supermarkets as seconds.
– Feasible
• Rent a local canning facility and convert the apples to
applesauce.
– Feasible
• Rent a local canning facility and convert the apples to pie
filling.
– Eliminate: major capital investment required
• Continue with the current dumping practice.
– Eliminate: status quo 6
Tactical Decision Making
Step 3: Identify Predicted Costs and Benefits;
Eliminate Irrelevant Costs
Bagging Alternative Applesauce Alternative
5 lbs of apples per bag 6 lbs of apples to produce five 16-
ounce cans of applesauce
Cost: $0.05 per pound for labor
and materials (bags and ties) Cost: $0.40 per pound for rent,
labor, apples, cans, and other
Revenue: $1.30 per bag materials
7
Tactical Decision Making
Step 4: Compare Relevant Costs and Relate to
Strategic Goals
Bagging Alternative Applesauce Alternative
Revenue per lb $0.26 Revenue per lb $0.65
Cost per lb 0.05 Cost per lb 0.40
Net benefit per lb $0.21 Net benefit per lb $0.25
Product Forward
differentiation integration
strategy strategy
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Tactical Decision Making
Step 5: Select Best Alternative
• The apple producer is reluctant to follow a
forward integration strategy
• The bagging alternative should be chosen
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Tactical Decision Making
continued 10
Tactical Decision Making
continued
11
Tactical Decision Making
12
Relevant Costs and Revenues
• Relevant costs
– future costs that differ across alternatives
• Irrelevant Costs
– Past costs: already incurred “sunk costs”
are the same across alternatives; ignore
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Relevancy, Cost Behavior, and the
Activity Resource Usage Model
• Flexible Resources
– Easily purchased in the amount needed
– Purchased at the time of use
• Committed resources
– Purchased before they are used
14
Relevancy, Cost Behavior, and the
Activity Resource Usage Model
• Flexible resources
– The activity resources demanded equal the
resources supplied
Demand changes relevant
Demand constant not relevant
15
Relevancy, Cost Behavior, and the
Activity Resource Usage Model
• Committed resources
– Excess of supply over demand is unused
capacity
Demand increase < unused capacity not relevant
Demand increase > unused capacity relevant
Demand decrease
Activity capacity reduced relevant
Activity capacity unchanged non relevant
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Relevancy, Cost Behavior, and the
Activity Resource Usage Model
A company has five manufacturing engineers
who supply a capacity of 10,000 engineering
hours (2,000 hours each).
The cost of this activity capacity is $250,000,
or $25 per hour. The firm expects to use
9,000 hours.
If the firm decides to reject a special order
requiring 500 hours, the cost of engineering
would be irrelevant.
17
Relevancy, Cost Behavior, and the
Activity Resource Usage Model
The firm can purchase a component that will
drop the demand from engineering hours
from 9,000 to 7,000.
Since engineering activity capacity is
acquired in chunks of 2,000, the company
can lay off one engineer or reassign the
engineer to another plant.
18
Relevancy, Cost Behavior, and the
Activity Resource Usage Model
19
Illustrative Examples of
Tactical Decision Making
• Common Decisions
– Make or Buy
– Keep or Drop
– Special Order
– Sell or Process Further
• Cost analysis informed by
– Activity-based cost management system
– Functional-based cost management system
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Illustrative Examples of
Tactical Decision Making
Make-or-Buy Decision
Talmage Company produces a mechanical part used in one of
its engines. (Talmage produces engines for snowblowers.) An
outside supplier has offered to sell a part (Part 34B) for $4.75.
The company normally produces 100,000 units of the part each
year.
Flexible resources: Committed resources:
• Using materials • Providing supervision
• Using direct labor • Moving materials
• Moving materials • Inspecting products
• Providing power • Setting up equipment
• Inspecting products
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Illustrative Examples of
Tactical Decision Making
Make-or-Buy Decision
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Illustrative Examples of
Tactical Decision Making
Keep-or-Drop Decision
If a segment is
dropped only
the traceable
revenues and
costs should
vanish
ABC
classifications
provide
information on
traceable costs
Drop? 24
Illustrative Examples of
Tactical Decision Making
Keep-or-Drop Decision
26
Illustrative Examples of
Tactical Decision Making
Accept or reject a special order
Special order unit revenue $1.75
Unit-level variable costs:
Dairy ingredients $0.70
Sugar 0.10
Flavoring 0.15
Direct labor 0.25
Packaging
Commissions
Distribution 0.03
Other 0.05
Unit-level costs $1.450
Non-unit-level variable costs for special order
Purchasing ($8 × 10,000) ÷ 2M 0.040
Receiving ($6 × 20,000) ÷ 2M 0.060
Setting up ($8,000 × 13) ÷ 2M 0.052
Non-unit-level costs 0.152 1.602
27
Net benefit per unit on special order $0.148
Illustrative Examples of
Tactical Decision Making
Sell or Process Further
Joint products have
common processes and costs Joint products with
of production up to a split-off common processes
point. and common costs
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Illustrative Examples of
Tactical Decision Making
Sell or Process Further
Differential Amount
Sell Process Further to Process Further
Process
further
29
COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan
End Chapter 19