1. RELEVANT ANALYSIS FOR TACTICAL DECISIONS
Which one do
we choose??? X Y Z

2. RELEVANT ANALYSIS Relevant items Irrelevant
Items (either revenues or costs) that DIFFER across alternatives
Items relating to FUTURE courses of action
Irrelevant
Past items (“sunk costs”)
Future items that DO NOT differ across alternatives

3. SUNK COSTS
Costs of resources that have already been committed, and regardless of what decision is made by managers, cannot be changed. These costs are irrelevant in decision making.
Significance of historical costs
Basis for determining cost behavior
Tax implications

4. EXAMPLES OF RELEVANT COSTS AND REVENUES
Cost increases & cash outflows
Down payment on a new machine
Monthly lease payments on a new machine
Cash savings and cash inflows
Disposal of old machine
Monthly cost savings
Materials
Labor
Overhead

5. OPPORTUNITY COST
The potential benefit sacrificed when, in selecting one alternative, another alternative is given up

6. RELEVANT ANALYSIS MODEL
Recognize and define problem
Identify feasible alternatives
Identify relevant items
Total relevant costs and benefits for each alternative
Assess qualitative factors
Select alternative with greatest overall benefit

7. RELEVANT ANALYSIS & CONTRIBUTION ANALYSIS
Contribution analysis is normal first step in relevant analysis
Cost behavior and relevance are NOT identical

8. ADDITIONAL CONSIDERATIONS
When determining “costs,” what costs are relevant?
All?
Only short-term variable?
How flexible are the capacities of the firm’s resources?

9. TACTICAL DECISIONS Make or Buy (Outsourcing)
Retain or Drop Product Lines
Special Orders
Sell or Process Further
Changes in Product Mix

10. SPECIAL ORDERS Decision Rule
Special orders that do not involve a long-term contract should be priced in relationship to available capacity

11. AVAILABLE SURPLUS CAPACITY Decision Rule
When capacity is available, incremental revenues have to be greater than incremental costs

12. DECISION RULE - OPPORTUNITY COSTS
The alternative that has the greatest contribution margin per unit of constrained resource should be selected, thereby minimizing the opportunity cost

13. NO AVAILABLE CAPACITY Decision Considerations
Additional capacity may be acquired through:
Overtime operations
Subcontracting
Which result in additional costs
When capacity is not available, incremental revenues have to be greater than incremental costs

14. A Decision to Sell or Process Further
Separate
Processing
Product A
Joint
Costs
Joint Input
Should the company
process further?
Product B
Separate
Processing
Split-off
point
Joint products

15. Implications of Relevant Analysis
Short-term vs. Long-term
Quantitative vs. Qualitative
Data probability
January 1996
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