Chapter 12Differential Analysis: Key to Decision Making

Incremental AnalysisA technique used in decision analysis that

compares alternatives by focusing on the differences in their projected revenues and costs.

Alternative A

Alternative B

Difference

Investment $1,000,000 $1,000,000 -0-

Revenues $275,000 year

$300,000 year

$25,000

Operating Costs

$100,000 year

$100,000 year

-0-

12-1 Relevant Decisions

Short Run Decisions

Keep or Drop (Segment Profitability)Make or BuySpecial OrderProduct (Sales) MixSell or Process Further

Keep or Drop TOTAL FIXED COSTS

  HOME OFFICE DIVISION CORPORATE OFFICE HEADQUARTERS   Allocatable Unallocatable Traceable Non Traceable Direct Common Avoidable Unavoidable

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

Exercise 12-2

Make or Buy1. 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 production2. Capacity exists3. Target Sales have already been reached 4. No fixed costs (both Selling and G&A and

overhead) are to be included----covered already5. Will not take away from regular customers6. Add any additional costs due to the order.

Exercise 12-4

Sales MixConstrained Resources or Constraint Labor Materials Machine HoursAnalysis 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 FURTHERIncremental Revenue – end of Joint costs to end of process further  Split off   ___Joint Costs___    Incremental Revenue   

Exercise 12-6