Chapter 20 Incremental Analysis

Incremental Analysis

Identifies financial data that change under alternative actions.

Relevant Costs

Costs that differ between alternatives.

Sunk Cost

Past cost not relevant to decisions.

Opportunity Cost

Benefit lost when one option is chosen over another.

Special Order Decision

Analyze whether to accept orders at reduced prices.

Make or Buy Decision

Compare internal production vs. outsourcing.

Sell or Process Further

Decide if additional processing increases profit.

Repair, Retain, or Replace

Evaluate whether new equipment is more profitable.

Eliminate Segment/Product

Drop if fixed cost savings > CM lost.

Incremental Revenue

Additional revenue from one alternative.

Incremental Cost

Additional cost from one alternative.

Joint Costs

Costs incurred before products are separately identifiable (sunk).

Unprofitable Segment

Business part with negative contribution margin

Decision Rule

process further if incremental revenue > incremental cost