TASK

CHAPTER 17

“TACTICAL DECISION MAKING”

BY

GROUP 11

Priska Qwintasari (0810532053)

Stiffani Elminda (0910532011)

Tarisa Chaira (0910532083)

Nora (0910532088)

Rivo Triyani (0910533152)

Afdal Putra Pratama (0910531010)

TACTICAL DECISION MAKING

Objetive 1 “ Tactical Decision Making Model”

Definition : Consists of choosing among alternative with an immediate or limited end in view.

Strategic decision making is selection among alternative strategies so that long term competitive advantage is established.

Some tactical decision tend to have the character of short-term, but have to be paid attention that decision short-term frequently contain long-range consequence. Frequently, tactical decision that used is small act which have benefit for a long term. So, the right tactical decision making made not only reached a limited objective, but also to the long term.

TACTICAL DECISION MODEL

Decision model is the series of procedures which if followed would lead to a decision.

A general approach to tactical decision making includes :

1. Recognize and define the problem .2. Identify alternatives as possible solution to the problem, eliminating those that are

unfeasible.3. Identify costs and benefits associated with each feasible alternative. Classify costs

and benefits are relevant or irrelevant and eliminate irrelevant ones from consideration.

4. Total relevant costs, benefits of each alternative.5. Asses qualitative factors.6. Select alternative with the greatest overall benefit.

these six steps are to define the models of making the simple decision. A decision model is a set of procedures that, if followed, will lead to a decision.

APPLYING TACTICAL MODEL

1. Define the problem The first step is recognizing and defining the problem of specific.

2. Identify alternativeThe second step is make a list and consider another deserved solution.a. Build new facility.b. Lease larger facility, sublease current facility.c. Lease additional facility. Similar facilityd. Lease additional building that would be used for warehouse only.e. Buy shafts and bushings, free up space made available.

3. Identify costs and benefits related with each feasible alternative.In the third step, has identified the costs and benefits associated with alternative in every feasible alternative. In this step, the various costs which is really not relevant, can be eliminated from the consideration.The management accountant is responsible for gathering necessary data.

4. Calculate the total relevant costs and benefits which are relevant to each feasible alternativeIts fine to include irrelevant costs and benefits in the analysis as long as they are included for all alternative.

5. Assess qualitative factorsAlthough the costs and revenues associated with the alternatives are important, both aren't able to solve the overall problem. Qualitative factors could significantly affect the manager’s decision. Factor qualitative represent factor which are difficult to be put in number.To illustrate the possible impact of qualitative factors on the make or buy decision, the consideration are quality and reliability of supply.

If the quality of shafts and bushing is significantly less if purchased externally than what is available internally, the quantitative advantage from purchasing can be more fictitious than real. usage of low certifiable materials can degrade quality of potentiometer, so that destroy sale. And so do if source of supply cannot be pledged, production schedules could be interrupted and customer orders could arrive late.

The qualitative factors be handled in the decision making process, the first they are must be identified and next the decision maker should try to quantify them.

6. Make decisionOnce all relevant costs and benefits have been assessed, and the qualitative factors is considered, the decision can be made.

RELEVANT COST DEFINED

Relevant cost is the cost that affects the decision.

All decision relate to the future, because of that only cost of future able to become relevant with decision. But to become relevantly, the cost not only have to represent the expense of future, but also have to different from one alternative with other alternative. If cost of future is the same for more than one alternative, it has no effect on the decision. Such a cost is an irrelevant cost. The ability to identify relevant and irrelevant cost is an important decision making skill.

RELEVANT COST ILLUSTRATION

To illustrated relevant expense concept, will be considered alternative making and buying.This past cost was used as the estimate of next time, although past cost are never relevant, they are often used to predict what future costs will be.

ILLUSTRATION OF AN IRRELEVANT PAST COST

Decrease or sunk cost is the cost of which cannot influence by any action at the future. Although this sunk cost of allocation to period to come and mention the allocation mentioned as decrease, do not one even also cost to obtain able to avoid. The sunk cost is the cost of past, and always will be same to each alternative, because of that, its irrelevant.

ILLUSTRATION OF AN IRRELEVANT FUTURE COST

The public cost allocation identifying which remain to precisely can be classified as is irrelevant since any choice usually does not affect the level of cost. The one influence may be a reallocation of those common fixed costs to fewer costs objects or segments.

ETHICS IN TACTICAL DECISION MAKING

In tactical decision making, ethical issues are always related to the way decisions are implemented, and the possible sacrifice of long-term goals for short-term results.Relevant cost is useful in making tactical decisions, decisions that have a direct or limited goals in mind, but decision makers must to be maintain ethical framework

Ethical standards have been developed to provide guidance for individuals. However, some ethical problems can be avoided simply by using common sense and not focusing solely on the short term at the expense of the long term.

Objective 2 “ Relevancy, Cost Behavior and The Activity Resource Usage Model “

Mostly tactical decision which requires analysis is very complicated, especially decisions that requires more extensive consideration of cost behavior.Relevant cost calculation initially stressed the importance of relevant costs versus fixed costs. Usually is the relevant variable costs while fixed costs do not.

The changes in supply and demand for activity resources must be considered when assessing relevance. If changes in demand and supply for resources across alternative brings about changes in resource spending, then the changes in resource spending are the relevant costs that should be used in assessing the relative desirability of the two alternative.

FLEXIBEL RESOURCE

Some flexible resources can be easily purchased with the necessity amount and when needed. For example, electricity used to run stoves that boil fruit in the production of jelly is a resources acquired as used and needed.If there a change of demand for an activity among the alternatives, it means that spending money in the resources will also change, and the decision to that cost of activities are relevant.

COMMITTED RESOURCES

The committed resources must be purchased before using it, therefore, in estimation, unused capacity will affect the decision making process.

1. Resources tied to short termResources of usage through implicit contracting are usually acquired in lumpy amounts, we usually think of this cost as step-variabel or step-fixed. This category often represent resources spending associated with an organization salaried and hourly employees.The implicit understanding is that the organization will maintain employment levels even though there may be temporary downturns in the quantity of an activity used. This means that an activity may have unused capacity available.

However, if a change in demand across activities produces a change in resource supply, then the activity cost will change, and like that to be relevant to de decision. A change in resource supply means a change in resource spending and consequently, a change in activity cost.

A change in resource spending can occur in one of two waya. The demand for the resource exceeds the supply (increasing resource spending)b. The demand for the resource drops permanently and supply exceeds demand enough

so that activity capacity can be reduced (decreases resource spending)

2. Resource tied for a few periodResource obtained in the face of for the requirement of production during some period, before the resource demands are known. For example, leasing and buying a building.Periodic resource spending, such as leasing, is usage is experienced, its difficult to reduce resource spending because of formal contractual commitments.

So, for the multiperiod resource category, changes in activity demands across alternative rarely resource spending, and are therefore not usually relevant for tactical decision making. When resource spending do es change, it means assessing the prospect of a multiperiod commitment, which is properly treated using capital investmentdecision models.

Objective 3 “ Illustrative Examples of Relevant Cost Applications “

Relevant costing is a value to solving many different of problems. Type of problem in illustrative examples is how to make a decision for: to make or buy a component, to keep or drop a segment or product line, to accept a special order at least than usual prices, etc.

1. Make or buy decisionManagement should evaluate past decision concerning production regularly. Condition upon which prior decision were based may have change,and as result, a different approach may be required. To illustrated more details about make or buy decision, assume that Swasey Manufacturing currently produces an electronic component used in one of its printer. Assume that: the full absorption cost of s wasey manufacturing is performs below:

Total cost Unit costRental of equipment $12,000 $1.20Equipment depreciation 2,000 0.20Direct material 10,000 1.00Direct labor 20,000 2.00Variable overhead 8,000 0.80General fixed overhead 30,000 3.00 Total $82,000 $ 8,20The question is:

Swasey has been approaches by a supplier of the component. The supplier will build the electronics component to swasey’s specifications for $4,75 per unit, meanwhile the full manufacturing cost per unit is $8,20.Say : the questions is....What the swaseys must do? Should Swaseys Manufacturing make or buy the component? Since we know that the offer sounds very attractive, because full manufacturing cost per unit is about $ 8,20

We can make a decision about what the most effective way, make the component or buy it. To make it easier, we decided to divide the step into 3 simple step: First, lets look at the cost associated with the production of these 10,000 parts. In the unit cost column we can see what is the effects of the component’s amount.

Second, identifying the relevant cost and the unrelevant cost in that table. Of these cost item, depreciation can be elimination. Reason: depreciation is a sunk

cost. Since the direct materials already purchased have no material use,half of the cost of

total direct material ia also sunk cost. General fixed overhead is not relevant either. Reason: the $30,000 (come from: 0,03 x

$1,000,000) ia an allocation of a common fixed cost that will continue even if the component purchased externally.

All other costs are relevant. Reason : they wouldn’t be incurred if the component is bought externally.

Third, make a full absorption cost’s table based on the second statement and totaled the column “make” and “buy”.

Make buy Differential cost to makeRental of equipment $12,000 - $ 12,000Direct material 5,000 - 5,000Direct labor 20,000 - 20,000Variable overhead 8,000 - 8,000Purchase cost - $ 47,500 (47,500)Receiving department labor - 8500 (8500)Total relevant cost $ 45,000 $56,000 $(11,000)

Focused on :1. The purchase of the component. The purchase cost is relevant. If the components

is made, the cost wouldn’t be incurred.2. Receiving department labor. An additional purchase of this magnitude would

require hiring an additional half time employee for the year at a cost of $8,500

Fourth, making a decision.Decision: The analysis shows that making the product is $11,000 cheaper than buying it. The offer of supplier should be rejected.

2. Keep or drop decisions

In the several cases, a manager needs to determine whether or not a segment, such as a products line, should be kept or dropped. To know when the products line should be keep or dropped, we can use a segmented reports and relevant costing to describes how the information should be used to arrive at a decision.

To illustrate, consider Norton Materials,Inc., which produces concrete blocks, bricks, and roofing tile.

Estimated income statement for 2001(in $1000):

blocks bricks tile TotalSales revenue $500 $800 $150 $1,450Less: variable expenses 250 480 140 870Contribution margin $250 $320 $10 $580Less direct and fixed expensesAdvertising $10 $10 $10 $30Salaries 37 40 35 112Depretiation 53 40 10 103Total $100 $90 $55 $245Segment margin $150 $230 $(45) $335Less: common fixed expenses

125

Operating income $ 210

Question: the projected performance of the roofing tile line shows a negative segment margin. This would represent the third consecutive year of poor performance for that line. What is the president of Norton Materials – Tom Blackburn decision? What is the most effective way, keep it or drop it?

To answer this question, we must thinking about all related possibility about this case. According to Tom Blackburn, he suggest to takes step to increase the sales revenue with an aggressive sales promotion cupled with an increase in the selling price. But, the marketing manager thinks that this approach would be fruitless

because an increase in the selling price would almost certainly result in a decrease in sales revenue.

Increasing the products line’s profitability through cost cutting is not feasible either, because of any further reductions would lower the quality of the products and adversely affect sales.

Because of there’s no action that the Norton Inc. do to keep maintain their roofing tile line, with no hope, Tom is decided to drop it. He reasons that the firm will lose a total of $10,000 in contribution margin, but save $45,000 by dismissing the line’s supervisor and eliminating its advertising budget.

Decision:

Dropping the product line has a $35,000 advantage over keeping it.

But making the decision is not as simple like that. There are so many thing that must considered. For the example, we can use the assume, to explained it.

1. Keep or drop with complementary effects

In response the memo, the marketing manager wrote that dropping the roofing tile line would lower sales of blocks by 10percent and of bricks by 8 percent. She explained that many customers buy roofing tile at the same time they purchase block or bricks. Somewill go elsewere if they can’t buy both products in same location.

Keep Drop Differential amount to keep

Sales $ 1450 $ 1186,0 $ 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

Based on the tabel, we can see that, differential amount to keep is about $ 15,6 so we can take the decision: keep the product line has a $15,6 advantage over dropped it.

2. Keep or drop with alternative use of facilities.

Assume that: the production supervisor response was somewhat different. He agreed that roofing tile shoul be eliminated but suggested that it be replaced with the production of floor tile, and also submitted the estimated financial statement for floor tile:

Sales $ 100

Less: Variable expenses $ 40

Contribution margin $ 60

Less: direct fixed expenses $ 55

Segment margin $ 5

keep Drop and replace Differential amount to keep

Sales $ 1450 $ 1286,0 $ 164,0

Less : Variable Expenses $ 870 $ 706,6 $ 163,4

Contribution margin $ 580 $ 579,4 $ 0,6

Conclusion : dropping the roofing tile line and replacing it with floor tile, then, will cause a $ 600 net decrease in total contribution margin. So, drop the product line and replace with floor tile could be the best decision.

Objective 4 “ Product Mix Decision “

What the purpose of product mix decisions? Product mix decisions help in producting a product have one contrained and multiple constrained. And moreover, product mix decision can have a significant impact on an company’s profitability.

For example,Jaya’s Company produces tempe (a cake of formented soya beans). This product have three kinds. Although the relative amount og each type of tempe can be influenced to some extent by the procedures followed in choosing the best fungus and beans, soaking

beans,mixing between beans and fungus and to be tempe . but the mix of product tempe is not always controlle by manager. So manager must to chose procedure that maximizes total profits or maximixes total contribution margin.

Many constrained in the producting is a product, for example, limitations of raw materials, limitations of labor inputs,limited demand for each product and soon. But if the firm posseses unlimited resoutce and the demand for each product is unlimited then the product mix decisions is simple produce an infinite number of each product.

Question

Joseph’s Company produces three types of band. There are band A,B,C. with unit contribution margins of $5, $7, $10. The firm owns eight machines that together provide 30000 hours of machine time per year. Band A requires 1 hours of machine time and band requires 0.5 hours of machine time. and band C requires 2 hours of machine time. What is the optimal mix of band?

Answer:

Band A : Band A requires 1 hours of machine time, 30000 units can be produced per year (30000/1). At $5 per unit, Joseph can earn a total contribution margin of $150000 (30000x$5).

Band B : Band B requires 0,5 hours of machine time, 60000 units can be produced per year (30000/0,5). At $7 per unit, Joseph can earn a total contribution margin of $420000 (60000x$7).

Band C : Band C requires 2 hours of machine time, 15000 units can be produced per year (30000/2). At $10 per unit, Joseph can earn a total contribution margin of $150000 (15000x$10).

So… the optimal mix is 420000 units of band B and none of band A and C because margin contribution per unit of each product is not the critical concern.

Objective 5 “Pricing”

COST BASE PRICING

Because revenue must cover company cost to get profit,companies decided how much cost bef ore fixed the price. Ussually,contain with cost base and markup. Markup is persentage that applied to base cost ,included in that desired profit,and all of the cost that not included in the base cost.

Mark up not always guaranted the company will get profit. Mark up just “pedoman” not absolutely rules. Markup pricing is often use by retail stores,and their markup kind is 100 percent of cost. Of course 100 percent mark up is not pure profit,the markup contain administratif staf salariries,payment for space and equipment,utilities,advertising,and other. The main advantage of markup pricing is that standard markup are easy to apply.

TARGET COSTING AND PRICING

Target costing is a methode of determining the cost of aproduct or services base on the price that costumer are willing to pay. Target costing is a methode that working backward from price to find cost. Marketing departement determine characteristics and price of product are most acc eptable to cunsumers. And then it is the job of company ‘s enggineer to design and develop the product such that cost and profit can be covered by the price.

Target costing involves much moreup front work than cost base costing. But remember ,the additional work that must be done if the cost base price turn out to be higher than what costumer s will accept. Then start the difficult task of bringing cost into line to support a lower price,or the opportunity cost of missing the market.

LEGAL ASPECTS OF PRICING

Customers and cost are important economic determinants of price. The US too.

- Predatory pricingIs the practise of setting price below cost for the purpose to injuring and eliminate the competitors. Twenty two states use the law against predatory pricing. Each state differing some what in deffinition and rules. The key of laws aspect is that price below cost to injuring competitors. Ussualy it is difficult to prove. In general ,state follow federal law in predatory pricingcase,and federal law make it difficult to prove predatory pricing because price competition absolutely is very important in bussiness.Predatory pricing on the international market is called dumping. And it happen when the company sell their products to other country by the price below the cost.

- Price discriminationPrice discrimination is charging of different price to different customer for product that same essentially. The robinson-patman act said something that unlawful if “ to discriminate in price between purchaser of commodities of like grade and quality...where the effect of such discrimination may be substantially to lessen competition,to tend to create an monopoly in any line of commerce,or to injure,destroy,or prevent competition with any personwho either grants or knowingly

receives the benefits of such discrimination,or with customers of either of them”. Important thing in robinson-patman act,can be allow to do price discrimination in some condition:1. The competition really want it2. The cost allow the low price

To count the different cost,the company must make classification of customers base on average cost of selling to customers. And then charge all customers in each group a cost justifiable price.

FAIRNESS AND PRICING

Society standard about fairness have an important effect on price. Price exploitation happen when company with market power price their product too high. If price just for covered the costmexploitation not occur. It is the reason why the company difficult to explain the cost structur and point out cost customers may not realize exsist.

Easy to see that cost as a justificationfor price underlies community standards about fairness. Ethics are builth on a sense of fairness. So,unethical behavior in pricing is related to taking un fair advantage of customers . cost related price increases are the best defense against customer rebellion.