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# Prepared by Diane Tanner University of North Florida

Chapter 11. Incremental Analysis. Prepared by Diane Tanner University of North Florida. Incremental Analysis. 2. What is it? Analysis of relevant revenues and expenses Incremental = Relevant = Differential General Rule

## Prepared by Diane Tanner University of North Florida

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### Presentation Transcript

1. Chapter 11 Incremental Analysis Prepared by Diane Tanner University of North Florida

2. Incremental Analysis 2 • What is it? • Analysis of relevant revenues and expenses • Incremental = Relevant = Differential • General Rule • Only amounts which differ between alternatives will impact the decision, so ignore all other amounts

3. Incremental Analysis Components 3 Incremental Revenue The additional revenue as a result of selecting one decision over another Incremental Cost The additional cost as a result of selecting one alternative over another Incremental Savings The reduction of cost as a result of selecting one alternative over another Usually combined/netted with incremental costs

4. Avoidable Cost: can be avoided if a certain decision is made Sunk Cost: a cost that has already been incurred and irreversible Opportunity Cost: Represents the benefit forgone by selecting one alternative over another Terminology 4 Relevant NOT Relevant Relevant

5. Why Do We Use Relevant Costs? 5 • Allows us to focus on only the few things that matter • Much quicker decision making • Mingling irrelevant costs with relevant costs may cause confusion and distract attention from critical matters Not Relevant Relevant

6. Steps in Incremental Analysis 6 Step 1: Compare revenues under both alternatives • The difference in revenues that change is the amount of relevant revenues • If revenues change, the difference is the incremental amount. Ignore all irrelevant revenues. Step 2: Compare costs under both alternatives • Costs that do not change are not relevant, so omit all irrelevant costs, including sunk costs. • List the amount of the change in costs because this is the only amount that is relevant.

7. Steps in Incremental Analysis cont 7 Step 3: Separate relevant costs into variable and fixed categories. Step 4: List and clearly label each incremental revenue, incremental cost, and incremental cost savings. • Include a + sign if the incremental amount increases profit (i.e., a benefit). • Show the amount in ( ) parentheses if the amount causes profit to decline.

8. Qualitative Issues 8 • Should be considered regardless if the outcome says to make the decision or reject the decision

9. The End

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