ACC2200 · Introduction to Management Accounting
Tactical Decision Making and Product Mix Decisions
Tactical Decision Making and Product Mix Decisions is the Weeks 10-11 topic in ACC2200 Introduction to Management Accounting at Monash University, where cost information is finally spent on short-run go / no-go decisions. The one discipline it tests is relevant costing: keep only the costs and benefits that differ between the alternatives and lie in the future, and ignore everything else — sunk costs, unavoidable costs and allocated fixed overhead. That single filter drives all five standard set-ups: accept-or-reject a special order, make-or-buy, keep-or-drop a segment, sell-or-process-further, and product mix under a scarce resource. The recurring exam prize is remembering the opportunity cost everyone forgets and ranking a product mix by contribution per unit of the constraint, not per unit of output.
What this chapter covers
- 011. Relevant information — a cost or benefit is relevant only if it DIFFERS between alternatives AND lies in the future
- 022. Sunk costs are always irrelevant; opportunity cost is relevant even though it is never recorded in the ledger
- 033. Avoidable vs unavoidable costs, and incremental (differential) revenue and cost as the number that decides
- 044. Special order — accept when incremental revenue > incremental cost; add the opportunity cost only when capacity binds
- 055. Make-or-buy — compare the cost to buy against the avoidable cost to make, less the value of any freed capacity
- 066. Keep-or-drop — weigh lost contribution against costs actually avoided; unavoidable fixed costs and lost complementary sales stay
- 077. Sell-or-process-further — process on only if extra revenue beats extra separable cost; the joint cost is sunk and ignored
- 088. Product mix with one constraint — rank by contribution per unit of the scarce resource; two or more constraints need linear programming
Product mix under a machine-hour constraint
- +3Contribution margin per unit = price − variable cost: Rower 900 − 500 = $400; Bench 500 − 180 = $320; Kettlebell 90 − 54 = $36.
- +3Contribution per machine-hour = CM per unit ÷ machine-hours per unit: Rower 400 ÷ 2.0 = $200; Bench 320 ÷ 2.0 = $160; Kettlebell 36 ÷ 0.15 = $240. This conversion into the scarce resource is the step most students skip.
- +2Rank by contribution per machine-hour (not per unit): Kettlebell $240 > Rower $200 > Bench $160. The Kettlebell has the lowest CM per unit yet ranks first because it barely uses the bottleneck.
- +3Allocate the 20,000 machine-hours in rank order, capped at demand: Kettlebell 40,000 × 0.15 = 6,000 hours (14,000 left); Rower 3,000 × 2.0 = 6,000 hours (8,000 left); Bench 8,000 hours ÷ 2.0 = 4,000 units, so 2,000 of the 6,000 Bench demand is left unmet.
- +2Optimal plan and total contribution: make all 40,000 Kettlebell + all 3,000 Rower + 4,000 Bench = 40,000×36 + 3,000×400 + 4,000×320 = 1,440,000 + 1,200,000 + 1,280,000 = $3,920,000 contribution, before fixed costs.
Key terms
- Relevant cost / benefit
- A cost or benefit that both differs between the alternatives and lies in the future. Only relevant items belong in a decision; anything that is the same under every option, or already incurred, is filtered out.
- Sunk cost
- A cost already incurred that no future decision can change — original equipment cost, past research, or joint processing already done. Sunk costs are always irrelevant, and markers plant them to see whether you exclude them.
- Opportunity cost
- The contribution forgone from the next-best use of a resource. It appears in no ledger yet is fully relevant, and it is the single most-missed item — at full capacity it can flip a special order from accept to reject.
- Avoidable vs unavoidable cost
- An avoidable cost is a future cost you escape by choosing one alternative (relevant); an unavoidable cost continues either way, such as allocated head-office overhead or a long-term lease (irrelevant).
- Incremental (differential) analysis
- Comparing alternatives using only the amounts that change — incremental revenue minus incremental cost. A two-column schedule of the differences is faster and clearer than rebuilding a full income statement.
- Contribution per unit of scarce resource
- Contribution margin per unit divided by the amount of the limiting resource each unit consumes (for example, CM per machine-hour). Under a single constraint you rank and produce by this figure, not by contribution per unit.
- Joint cost and split-off point
- Joint products emerge together from one shared process up to the split-off point; the cost of that shared process is the joint cost. It is sunk before the products can be told apart, so it is irrelevant to any sell-or-process-further decision made afterwards.
Tactical Decision Making and Product Mix Decisions FAQ
Can AI help me with tactical decision making and product mix decisions?
Yes — ask Sia to walk through any tactical decision making and product mix problem or concept step by step, the way Monash University tests it.
Why is full absorption cost usually the wrong number for a decision?
Because it bundles in costs that do not change with the decision — chiefly allocated fixed overhead spread across units. A tactical decision only cares about what actually differs between the alternatives, so you strip out sunk and unavoidable costs and compare incremental revenue against incremental (avoidable) cost. Judging a special order against full cost is a classic mark-loser: the order can add profit at a price below full cost because the fixed overhead is paid regardless.
What is opportunity cost and why does it keep flipping the answer?
Opportunity cost is the contribution you give up on the next-best use of a resource — for example, the contribution on regular sales you must displace to fill a special order. It never appears in the accounts, which is exactly why students forget it. When there is spare capacity the opportunity cost is zero and the order is easy to accept; once capacity binds, the forgone contribution becomes a real relevant cost that can turn an accept into a reject.
How do I rank products when one resource is scarce?
Rank by contribution margin per unit of the scarce resource, not per unit of output. Work out each product's contribution per unit, divide by the machine-hours (or whatever the bottleneck is) each unit consumes, then produce in that ranked order up to demand until the resource runs out. The product with the highest contribution per unit often loses once you measure it per constraint-hour — that reversal is the most-tested trap.
In a sell-or-process-further question, what happens to the joint cost?
You ignore it entirely. The joint cost is incurred before the products split off, so it is sunk and identical under both the sell-now and process-further options. The decision compares only the incremental revenue from further processing against the incremental separable cost of that processing. The revenue you could bank by selling at split-off is the relevant opportunity cost, which is why you compare the extra revenue with the extra cost, not the final price with the processing cost.
How is this topic examined in ACC2200?
Weeks 10-11 are a primary emphasis of the closed-book supervised e-exam (four multi-part questions, 100 marks, roughly 60% calculation and 40% discussion). Expect a full question on one decision type — special order, make-or-buy, keep-or-drop or product mix — that asks you to identify the relevant costs, compute the incremental effect, and advise with qualitative factors such as quality, supplier reliability and reversibility. The advice and the reasons a cost is irrelevant carry as many marks as the arithmetic.
Studying with AI? Sia — free AI accounting tutor works through ACC2200 step by step.
Exam move
Tactical decision making is the payoff chapter, so drill it as one method wearing five costumes rather than five separate topics. First, make the relevant-cost filter automatic: for any scenario, in one pass keep only the future costs and benefits that differ, and be able to say aloud why each sunk, unavoidable or allocated cost is irrelevant. Second, rehearse each set-up from a blank sheet — a special order with and without spare capacity (the opportunity-cost flip), a make-or-buy comparing buy cost with avoidable make cost plus freed-capacity value, a keep-or-drop weighing lost contribution against avoidable fixed cost, a sell-or-process-further that ignores the joint cost, and a product mix ranked by contribution per unit of the scarce resource. Third, since about 40% of the marks are discussion, practise closing every answer with two qualitative factors tied to the scenario — quality, delivery reliability, customer relationships, staff morale, or the reversibility that separates a tactical make-or-buy from genuine outsourcing. Where a step will not click — why the joint cost drops out, or why the highest contribution-per-unit product can still lose — ask Sia to generate a fresh decision scenario and explain each step, then re-derive the numbers yourself under timed conditions.
