Quiz 17: Activity Resource Usage Model and Tactical Decision Making

Business

1)Identify the options for B Company: B Company was manufacturing microwave ovens 18,000 per year. Total unit manufacturing cost is $4 per unit. Recently company get one offer from the outside supplier i.e. supplier wants to supply for $1.38 per unit. Following are the alternatives available to B Company: • B Company can produce the component themselves or • B Company should purchase the component from outside suppliers. 2)Identify the relevant cost for the purchase and production if fixed cost is unavoidable: The relevant costs of internal production and of external purchase are as follows: Relevant cost for internal production: img Therefore, relevant cost for production is $1.25 per unit. Relevant cost for external purchase: Here relevant cost is $1.38 per unit since it is the amount need to pay by the company to get one unit. 3)Identify the best alternative that is more cost effective: Internal Production is more cost effective as the relevant cost of internal production is less than external purchase. img 4)Identify the best alternative if $18,540 fixed cost is avoidable: Total required units = 18,000 Avoidable fixed cost = $18,540 img Relevant cost for internal production: img Relevant cost for external purchase: Here relevant cost is $1.38 per unit since it is the amount need to pay by the company to get one unit. Conclusion: In this external purchase is more cost effective as compared to internal production as the relevant cost of external purchase is less than internal production. img

Tactical decision making consists of choosing among the alternatives with an immediate or limited end in view. Tactical decision may belongs to short run that an "accepting of special order which is less than the normal selling price" or may belongs to long run that "the company considering making component rather the buying it from outside". However the tactical decision should support overall objective even if immediate objective is short run or long run. A sound tactical decision achieves not only the limited objective but also serve a larger purpose. The tactical decision process would be generally as: 1. Recognize and define the problem 2. Identify alternatives as possible solutions to the problem, and eliminate any un feasible alternatives 3. Identify the cost and benefits which associated with each feasible alternative. Eliminate the costs and benefits that are not relevant to the decision. 4. Compare the relevant costs and benefits for each alternative. 5. Asses qualitative factors 6. Select the alternative with the greatest overall benefit.

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