Dq Week 6 #1

Topics: Economics, Costs, Sunk costs Pages: 1 (280 words) Published: April 10, 2013
What is incremental analysis? Provide an example of how incremental analysis might be used to make business decisions. Incremental analysis, sometimes called marginal or differential analysis, is used to analyze the financial information needed for decision-making. It identifies the relevant revenues and/or costs of each alternative and the expected impact of the alternative on future income. A decision-making technique used in business to determine the true cost difference between alternatives. Incremental analysis ignores sunk costs and costs that are the same between the two alternatives to look only at the remaining costs. Businesses use incremental analysis as part of their managerial accounting to help them make a wide variety of financial decisions. These include deciding whether to accept an order at a special price, buy individual components or opt for a finished product, to keep or replace equipment and eliminate, or not, an unprofitable sector of a business. In my organization, we used the incremental analysis when building a business case to replace copy machines in the district. Using incremental analysis, we did not look at the cost of the existing copy machine because it is a sunk cost (the cost of buying it cannot be reversed). We analyzed the cost of toner cartridges for each machine, the cost of the electricity run each machine, and most importantly, the time saved by having employees use a more efficient model and perhaps the cost savings of being able to prepare documents in-house instead of outsourcing them. Businesses can also use the incremental analysis when accepting additional business, making or buying parts or products, selling products or processing them further, eliminating a segment, or allocating scarce resources.
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