Differential Analysis: Key to Decision Making

Incremental Analysis A technique used in decision analysis that compares alternatives by focusing on the differences in their projected revenues and costs.

Alternative AAlternative BDifference Investment$1,000, Revenues$275,000 year$300,000 year$25,000 Operating Costs $100,000 year -0-

12-1 Relevant Decisions

Short Run Decisions Keep or Drop (Segment Profitability) Make or Buy Special Order Product (Sales) Mix Sell or Process Further

Keep or Drop TOTAL FIXED COSTS HOME OFFICE DIVISIONCORPORATE OFFICE HEADQUARTERS AllocatableUnallocatable TraceableNon Traceable DirectCommon AvoidableUnavoidable

Table Format Sales -VC =Contribution Margin - Traceable =Product Line Segment TOTAL COSTs -Common Fixed =Net Income

Exercise 12-2

Make or Buy 1.Do we have the capacity? Factory, Machines, Labor 2. Do we have the capability? Copyrights, Molds, Knowledge, Skill 3. Can we make it at acceptable Quality? Good Vendors available Monitoring the quality

Exercise 12-3

Special Order “Remember it is SPECIAL.—one time only” 1. over and above normal production 2.Capacity exists 3.Target Sales have already been reached 4.No fixed costs (both Selling and G&A and overhead) are to be included----covered already 5.Will not take away from regular customers 6. Add any additional costs due to the order.

Exercise 12-4

Sales Mix Constrained Resources or Constraint Labor Materials Machine Hours Analysis Formulas Compute # of hour s, resources per unit Total $/ Cost per unit CM per unit

Sales -Variable Cost = Contribution Margin / resource per unit = Contribution Margin per resource

Exercise 12-5

SELL OR PROCESS FURTHER Incremental Revenue – end of Joint costs to end of process further Split off ___Joint Costs___ Incremental Revenue

Exercise 12-6