Incremental analysis is a vital tool for decision-making. It can become an identifier of the best alternative when multiple options are present. Incremental analysis involves relevant costs and ignores sunk costs. It is based on the differences of revenues and costs. Cost information, which would be relevant for a decision to drop a product line, would be the direct fixed costs associated with that product line. Avoidable costs or costs that can be eliminated should be assessed additionally. Change in income should also be considered before making a final decision.
Case 2-1: Ethics Case: Brixton Surgical Devices
Ed and Robin are not being ethical in their decision to perpetuate sales in the fourth quarter by offering discounts and increasing inventory. Ed and Robin are manipulating production so as to lower costs of goods sold and enhance their earnings while increasing financial incentives. They are engaging in strategies, which will boost their own income. Their opportunism will have an impact on investors. Investors utilize current earnings to value securities and they also utilize current earnings to predict future outcomes. Inflating profits for personal gain is illegal and is in no way ethical.
Cook, K. (2008). Managing Earnings by Manipulating Production: The Effects of Timing, Tax, Compensation, and Governance Considerations. Retrieved on October 26, 2010 from http://docs.google.com/viewer?a=v&q=cache:4V9h_Efb5X0J:dhanna.cox.smu.edu/SMUWeb/workshop/cdiss.pdf+Managing+Earnings+by+Manipulating+Production:+The+Effects+of+Timing,+Tax,+Compensation,+and+Governance+Considerations&hl=en&gl=us&pid=bl&srcid=ADGEESh4Zhnqkw5HHmQVP61eindNKsRnj-X-3BxGO7AzucIo6-mnujeT2GuqVrXA_e5md4amHYlLG7S-XszobsOIIRKTZL6t7_bqQ-OKd8P-hEoP-6NfKE9g7-ztzHoIUE16SbvJtsMh&sig=AHIEtbS469cGexvo3vo44VJVtbVNbTGtGA
Jiambalvo, J. (2010). Managerial Accounting 4th Edition. United States: John Wiley and Sons, Inc.