Chapter 7: Incremental Analysis Flashcards Preview

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Flashcards in Chapter 7: Incremental Analysis Deck (10):

Incremental Analysis Approach

  • Process used to identify the financial data that change under alternative course of action 


Relevant Cost

Cost that will differ between our Alternatives 


Opportunity Cost

  • Cost we incurr by given up the opportunity of some other Alternative 
  • "Lost Benefit"


Sunk Cost

  • Cost which cannot be changed by future decisions 
  • Should not be part of decision making 


Wichtigste aus Make-Or-Buy 

  • Keep fixed Cost in mind
    • can we get rid of the fixed cost
    • if not ATTENTION 
  • und ggf. Opportunity Cost 
    • By Buying the good we (free up some production capacity and are) able to produce a diffrent good and receive a REVENUE for it
    • wird in der MAKE SPALTE aufgeführt, da fehlender Umsatz 


Sell or Process Further

Decision Rule: 

  • Process further as long as incremental revenue from such processing exceeds the incremental processing cost 
    • Revenue of Processing > Cost of Processing

Achtung: Multiple Product Case

  • Joint Cost are SUNK COST


Joint Product Cost 

  • Are SUNK COST and thus not relevant to the sell-or-process further decision 


Accept an Order at a Special Price 

  • Net Income > 0: Accept order 
  • Cost:
    • Fixed Cost do NOT change when working at no full capacity
    • Variable Manu Cost Changes 
  • Revenues: 
    • Changes (in the amount of the new Order) 




Book Value of Old Machines

  • does NOT affect the decision

Possible Sale Revenue of Old Machine 

  • relevant !!!! 


If the VARIABLE MANUFACTURING COST more than offset the cost of the new equipment during the period of anaylsing (4 years) the possibility of replacing seems more and more reasonaalbe !!!!


Eliminate an Unprofitable Segment / Product

ACHTUNG: Fixed Cost

  • Fixed Cost that were allocated to the eliminated Product/Segment will have to be ABSORBED BY THE REMAINING PRODUCTS/SEGMENTS
  • ggf. kann man Fixed Cost verringern