Tactical Decision Making
Tactical Decision Making
Tactical Decision Making
consists of choosing among alternatives with an immediate or limited end in view. Accepting a
special order for less than the normal selling price to use idle capacity and increase this year's profits is an example. The
immediate objective is to use idle productive capacity to increase short-run profits. Thus, some tactical decisions tend to
be short run in nature; however, it should be emphasized that short-run decisions often have long-run consequences.
A general tactical decision-making model is outlined here. The six steps describing the process are
listed below:
A decision model is a set of procedures that, if followed, will lead to a decision.
Qualitative Factors
How should qualitative factors be handled in the decision-making process? First of all, they must be identified. Secondly,
the decision maker should try to quantify them. Often, qualitative factors are simply more difficult to quantify, but not
impossible. For example, possible unreliability of an outside supplier might be quantified as the probable number of
days late multiplied by the labor cost of downtime in the plant. Finally, truly qualitative factors, such as the impact of
late orders on customer relations, or the apple producer's discomfort with the canning option, must be taken into
consideration in the final step of the decision-making model—the selection of the alternative with the greatest overall
benefit.
Relevant costs (revenues) are future costs (revenues) that differ across alternatives. Since relevant revenues are treated
in the same way as relevant costs, we will simplify the discussion by concentrating on costs. All decisions relate to the
future; accordingly, only future costs can be relevant. In addition, the cost also must differ from one alternative to
another. If a future cost 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 costs is an important decision-making skill.
Past Costs
Depreciation represents an allocation of a cost already incurred. It is a sunk cost, because no future decision
can alter the original cost of the machinery; the original cost is the same for both alternatives. Although we
allocate this sunk cost to future periods and call it depreciation, none of the original cost is avoidable. Sunk
costs are past costs and are always irrelevant. Thus, the acquisition cost of the machinery and its associated
depreciation should not be a factor in the make-or-buy decision.
Future Costs
The cost of providing plant utilities is a future cost, since it must be paid in future years. But does the cost differ across
the make-and-buy alternatives? It is unlikely that the cost of heating and cooling the plant will change whether nacelles
are produced or not. Thus, the cost is the same across both alternatives. The amount of the utility payment allocated to
the remaining departments may change if production of nacelles is stopped, but the level of the total payment is
unaffected by the decision. It is therefore an irrelevant cost.
A tariff is a tax on imports levied by the federal government. Any cost associated with the purchase of materials, such as
freight-in or a tariff, is a materials cost.
The activity resource usage model focuses on the use of resources and has two categories: (1) flexible resources and (2)
committed resources.
For flexible resources, the resources demanded (used) equal the resources supplied. Thus, for this category, if the
demand for an activity changes across alternatives, then resource spending will change and the cost of the activity is
relevant to the decision.
Committed resources are acquired in advance of usage through implicit contracting, and they are usually acquired in
lumpy amounts. Consider an organization's employees. The implicit understanding may be that the organization will
maintain employment levels even though there may be temporary downturns in the amount of an activity used,
meaning that an activity may have unused capacity. Increased demand for an activity across alternatives may not mean
increased cost—if there is sufficient unused capacity.
However, if a change in demand for the activity requires a change in resource supply, then the activity cost will be
relevant to the decision. This change in cost can occur in one of two ways: (1) the demand for the resource exceeds the
supply (increases resource spending), or (2) the demand for the resource drops permanently and supply exceeds
demand enough so that activity capacity can be reduced (decreases resource spending).
A keep-or-drop decision uses relevant cost analysis to determine whether a segment or line of business should be kept
or dropped. In a traditional cost management system, segmented income statements, using unit-based fixed or variable
costs, improve the ability to make keep-or-drop decisions.