Incremental Analysis Incremental Revenue
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CHAPTER 7 The Use of Cost Information in Management Decision Making Incremental Incremental Analysis Analysis Incremental Revenue Additional revenue received by selecting one alternative over another Incremental Cost Additional cost incurred by selecting one alternative over another Relevant Costs, Differential Costs Incremental Profit Difference between incremental revenue and incremental cost Incremental Incremental Analysis Analysis Example Example Incremental Incremental Analysis Analysis Example Example Expanded Expanded Analysis Analysis of of Decisions Decisions Faced Faced by by Managers Managers The following decisions faced by managers require analysis of incremental costs and/or revenues 1. Additional Processing of a Product 2. Make or Buy a Product 3. Drop a Product Line Analysis Analysis of of Decisions Decisions Faced Faced by by Managers Managers Additional Processing of a Product Decision to sell a product in a partially completed stage or incur the additional processing costs Additional Additional Processing Processing Decision Decision – – Bridge Bridge Computer Computer Example Example Summary of Cost Information Sale Price @$500 Sales Price $1,000 Additional Additional Processing Processing Decision Decision – – Bridge Bridge Computer Computer Example Example Incremental Analysis Summary Make Make or or Buy Buy Decisions Decisions Make or Buy a Product Decision involves no incremental revenues Analysis concentrates solely on incremental costs Make -or-Buy Decisions Make-or-Buy Decisions – – General General Refrigeration Refrigeration Example Example Incremental Cost Analysis Make -or-Buy Decisions Make-or-Buy Decisions – – General General Refrigeration Refrigeration Example Example Incremental Cost Analysis Summary Make Outsourcing Terminology Terminology Summary Summary Sunk Costs Costs that are already incurred Are never incremental costs because they never differ among decision alternatives Sunk Costs Effect Avoidable Costs Costs that can be avoided if a particular action is undertaken Opportunity Costs Value of benefits foregone by selecting one decisions alternative over another Make -or-Buy Decisions Make-or-Buy Decisions – – General General Refrigeration Refrigeration Example Example Incremental Cost Analysis with Opportunity Costs Drop Drop aa Product Product Line Line A very significant decision Analysis involves calculating the change in income that will result from dropping the product line. If income will increase, the product line should be dropped If income will decrease, the product line should be kept Dropping Dropping aa Product Product Line Line – – Mercer Mercer Hardware Hardware Example Example Dropping Dropping aa Product Product Line Line – – Mercer Mercer Hardware Hardware Example Example Qualitative Qualitative Considerations Considerations in in Decision Decision Analysis Analysis Most make-or-buy decisions have one or more features that are difficult to quantify but should be considered Loss of Control Quality of Product Quality of Service Company Morale Qualitative Qualitative Factors Factors
