Differential Analysis, Product Pricing, and Activity-Based Costing LO 1a – Overview of Differential Analysis

Differential Analysis LO 1 Differential Analysis Managerial decision making involves choosing between alternative courses of action. Managerial decision making involves choosing between alternative courses of action.

Managerial Decision Making LO 1 Differential Analysis Managerial Decision Making Step 2: Identify the alternative courses of action Step 1: Identify the objective of the decision Step 3: Gather relevant information and perform differential analysis. Although the managerial decision-making process varies by the type of decision, it normally follows the five steps outlined on this slide. Step 5: Review, analyze, and assess the results of the decision Step 4: Make a decision

Bryant Restaurants, Inc. LO 1 Differential Analysis Bryant Restaurants, Inc. Step 2: Identify the alternative courses of action Use floor space for existing tables, or… replace the tables with a salad bar. Step 1: Identify the objective of the decision Increase its income. Tables Salad Bar Revenues $100,000 $120,000 Costs 60,000 65,000 Income $ 40,000 $ 55,000 Step 3: Gather relevant information and perform differential analysis. Step 5: Review, analyze, and assess the results of the decision Step 4: Make a decision

Differential Analysis LO 1 Differential Analysis Differential analysis, sometimes called incremental analysis, analyzes differential revenues and costs to determine the differential impact on income of two alternative courses of action. Differential analysis focuses on the effects of selecting alternative courses of action by examining only the relevant costs and revenues.

Differential Analysis LO 1 Differential Analysis Differential revenue is the amount of increase or decrease in revenue that is expected from a course of action as compared to an alternative. Differential revenue is the increase or decrease in revenue that is expected from selecting one course of action over another.

Differential Analysis LO 1 Differential Analysis Differential cost is the amount of increase or decrease in cost that is expected from a course of action as compared to an alternative. Differential cost is the increase or decrease in cost that is expected from selecting one course of action over another.

Differential Analysis LO 1 Differential Analysis Differential income (loss) is the difference between the differential revenue and the differential costs. Differential income indicates that a particular decision is expected to be profitable, while a differential loss indicates that the decision is expected to decrease income. Differential income or loss is the difference between the differential revenue and differential costs. Differential income indicates that a particular decision is expected to be profitable while a differential loss indicates the opposite.

Differential Analysis LO 1 Differential Analysis Choices are evaluated by considering only the net differential income or loss of the alternatives. The net differential income or loss is calculated by deducting differential costs from differential revenues. The net differential income or loss is the sum of the differences in revenues and costs between alternatives A and B.

Differential Analysis LO 1 Differential Analysis In this chapter, differential analysis is illustrated for the following common decisions: Leasing or selling equipment Discontinuing an unprofitable segment Manufacturing or purchasing a needed part Replacing fixed assets Processing further or selling a product Accepting additional business at a special price Differential analysis is used to make decisions such as: leasing or selling equipment, discontinuing an unprofitable segment, manufacturing or purchasing a needed part, replacing usable fixed assets, processing further or selling an intermediate product, and accepting additional business at a special price.