Incremental Analysis: Ninth Edition
Incremental Analysis: Ninth Edition
Incremental Analysis: Ninth Edition
Ninth Edition
Chapter 7
Incremental Analysis
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©2018 John Wiley & Sons, Inc. 6
How Incremental Analysis Works
Costs Decrease
This will INCREASE Net Income
Net the difference and you have an overall INCREASE in Net Income
Sunk costs are costs that have already been incurred and
cannot be changed or avoided by any future decision.
Option 2
revenues of $80,000 per year
maintenance expenses of $12,000 per year
operating expenses of $32,000 per year
will free up resources that will increase revenues by $3,000
Total Difference
Total Difference
Total Difference
If option 1 is selected, the opportunity to earn 3,000 is lost, therefore the opportunity cost
is recorded for the option where extra profit is not available
Illustration 7.3
Remember,
this is
asking how
NI is
What changes if I accept the affected.
If I reject the special order,
offer? Will Revenue go up?
nothing changes! I go on
Will Costs go up?
with business as usual
making my normal profit!
*Fixed costs are already
covered by normal operations!
*5,000 × $25
**(5,000 × $18) + (5,000 × $1)
Should I MAKE or
BUY this part?
Assume that through buying the switches, Baron Company can use
the released productive capacity to generate additional income of
$38,000 from producing a different product. This lost income is an
additional cost of continuing to make the switches in the make-or-buy
decision.
*$24,000 × .75
**166,000 × $0.90
Should I continue
or eliminate this
unprofitable
segment?
Should Eliminate