Tactical decision making involves short-term decisions to utilize resources and increase profits. The document outlines a tactical decision making model and applies it to examples. It discusses identifying alternatives and relevant costs that differ between alternatives to select the optimal choice. The model is demonstrated on a company considering renting space or outsourcing production. Relevant costs like labor are compared between make vs buy alternatives to inform the decision.

1. TACTICAL DECISION MAKING
Presented by:
Zainal Abidin, S.E.,M.Ak.,Ak

2. Learning Objectives
1. Describe the tactical decision-making model
2. Apply tactical decision-making concepts in variety of business
situation
3. Choose the optimal product mix when faced with one constrained
resources
4. Explain the impact cost on pricing decisions

3. Consists of choosing among alternatives with an immediate or
limited end in view.
TACTICAL DECISION MAKING: Definition
What is the difference between tactical and strategic decisions ?
Tactical Decision Making Strategic Decision Making
Short-run decision oriented Long-term decision oriented
To utilize idle capacity & increase this
year’s profits
To create competitive advantage

4. Example
Tactical Decision Making
1. Accepting a special order for less than the normal selling
price to utilize idle capacity and increase this year’s profits
2. Suppose that a company is considering producing a
component instead of buying it from suppliers.

5. 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
5. Assess qualitative factors
6. Select alternative with greatest overall benefit

6. TIDWELL PRODUCTS: Background
Tidwell Products Inc. is facing expanded production that is
straining the capacity in facilities with 5 years remaining
on their lease. Currently, the company needs more
warehousing and office space. Two feasible alternatives
under consideration are a) to rent an additional building for
warehousing and b) outsource production. The CFO will
prepare a report of detailed costs for these alternatives.

7. APPLYING TACTICAL MODEL
eliminated
eliminated
eliminated
feasible
feasible

8. APPLYING TACTICAL MODEL
Make
Buy
Favor of
Alternative 5

9. Relevant Cost
Relevant costs are future costs that differ across alternatives.
Ada 2 karaksteristik dari relevant cost:
1. Biaya masa depan (future costs), keputusan yang diambil
terkait dengan masa depan
2. Biaya tersebut berbeda (differ) diantara alternatif lainnya.
Contoh relevant cost: direct labor, fixed overhead cost
Irrelevant costs are costs has no effect on the decision making/no
differ across alternatives.

10. Relevant Cost Ilustrated
In Tidwell Products’ decision, the cost of direct labor ($150,000 of
variable production costs) is a relevant cost because it differs
between Alternatives #4 & #5 (Make)
There is no labor cost if shafts & bushings are purchased externally
(Buy)
Conclusion:
($150,000 for the make alternative and $0 for the buy alternative /
alternative 5)

11. IRRELEVANT COST
In Tidwell Products’ decision, the depreciation cost of the
leased building is irrelevant because it is a sunk cost that
a) Is not affected by future actions;
b) Can not be avoided; and
c) Does not differ across alternatives.
General fixed overhead also irrelevant cost
*Depreciation represents an allocation of a cost already incurred

12. Fixed Cost (Relevant Cost or Irrelevant Cost?)
FIXED COST
DIRECT
FIXED COST
GENERAL
FIXED COST
RELEVANT COST:
Supervisor Salary for Product A/B
IRRELEVANT COST:
Machine Depreciation Cost
IRRELEVANT COST:
• Factory Depreciation Cost
• Land & Building Tax (PBB)

13. RELEVANT VS IRRELEVANT COSTS
Alternative of Make and Buy
Relevant cost
Irrelevant cost
Irrelevant cost

14. 14
TACTICAL DECISION-MAKING: Examples
Make-or-Buy Decisions
Keep or Drop
Keep or Drop & Replace
Special order

15. 1. MAKE OR BUY DECISION
 Swasey Manufacturing, currently produces an
electronic component used in one of its printers. In
one year, Swasey will switch production to another
type of printer, and the electronic component will
not be used.
 Should Swasey produce 10,000 components to
support the production requirements or should they
purchase the component for $4.75?

16. 1. MAKE OR BUY DECISION
Unit costs are
calculated on the
basis of producing
10,000 printers.
Relevant Cost
The analysis shows that
making the product is $11,000
cheaper than buying it. The
offer of the supplier should be
rejected.
Relevant unit costs:
$4.50 ($45,000/10,000) for Make
$5.6 ($56.000/10,000) for but
Eliminated
Eliminated
Note: Half of the cost of total direct materials is also a sunk cost

17. 2. KEEP or DROP
• Norton Materials produces 3 products: blocks, bricks, and tile. The tile
segment has a negative segment margin and does not contribute to
common fixed expenses. Should Norton drop the tile division?
• Estimated income statement for 2008 (in thousands of dollars):
1. Keep: saves $10,000
CM
2. Drop: eliminates
$45,000 segment loss
Eliminated
Conclusion:
Dropping the product
tile has a $35,000
advantage over keeping it

18. 3. KEEP or DROP & REPLACE
The marketing manager wrote that dropping the roofing tile line would
lower sales of blocks by 10 percent and of bricks by 8 percent.
After receiving this response, Tom Blackburn decided to repeat the
analysis, factoring in the effect that dropping the tile line would have
on the sales of the other two lines.
1) Blocks = 10% x $500.000 = $ 50.000
2) Bricks = 8% x $800.000= $64.000
3) Tile = $150.000
Total = $264.000
Drop of Tile:
1) Blocks Sales = $ 500.000 - $50.000 =
$450.000
2) Bricks Sales = $800.000 - $64.000 =
$736.000
Total sales if drop of Tile: $1.186.000
Tom was pleased to find the outcome favoring
production of the roofing tile

19. 4. SPECIAL ORDER
• An ice cream company is
operating at 80% of its 20 million
gallon capacity. The company
receives an offer to purchase 2
million gallons for $1.55 per
gallon. This is below the
wholesale price of $2.00. Should
the company accept the offer?
$1,45 per unit = $1,50 - $ 0,05

20. 4. SPECIAL ORDER
$1,55 x $2.000.000
$0,70 x $2.000.000
$0,10 x $2.000.000
$0,15 x $2.000.000
$0,25 x $2.000.000
$0,20 x $2.000.000
$0,05 x $2.000.000
Net benefit $0,10 = ($1,55 − $1.45) per unit
Accepting the special order will increase profits
by $200,000 ($0.10 x 2,000,000).

21. THE IMPACT COST ON PRICING
• Means setting a sales price based on marking up a base cost such as
COGS or direct materials by a certain percentage. Elvin Company’s
income statement for last year is as follows:

22. COST-BASED ON PRICING

23. THANKS