1. Introduction and Objectives
Internal managers frequently face short-term tactical decisions under resource constraints. This lesson details how to apply the principles of relevant costing and contribution analysis to evaluate business cases.
 
2. Core Tactical Decision Frameworks
  • Make-or-Buy (Outsourcing) Decisions: Comparing the internal variable cost of producing a component against an external supplier’s purchase price. Rule: Fixed overheads should be ignored unless they can be completely eliminated by outsourcing.
  • Special Order Evaluation: Evaluating whether to accept a one-time customer order below the standard market price. Rule: The order should be accepted if it generates a positive contribution margin and the company has sufficient idle capacity without disrupting regular sales.
  • Drop or Retain a Segment: Evaluating whether to close an underperforming branch or product line. Rule: If the segment generates a positive contribution margin, it should be retained because its contribution helps cover shared corporate fixed costs, unless closing it eliminates enough traceable fixed costs to offset the lost contribution.

3. Managing Limiting Factors (Key Resource Constraints)
When production is limited by a scarce resource (e.g., machine hours, skilled labor shortages, raw material supply), products must be prioritized based on efficiency rather than their raw unit profitability.
  • Optimization Decision Parameter:

    Optimization Ranking Factor = Unit Contribution Margin of the Product / Quantity of the Scarce Resource Required per Unit
  • Strategic Rule: To maximize total corporate profit, production capacity must be allocated first to the product that generates the highest contribution margin per unit of the scarce resource.

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