How Incremental Analysis Works

How Incremental Analysis Works - do change. For example,...

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How Incremental Analysis Works The following example illustrates the basic approach in incremental analysis. Illustration 23-2 Basic approach in incremental analysis This example compares alternative B with alternative A. The net income column shows the differences between the alternatives. In this case, incremental revenue will be $15,000 less under alternative B than under alternative A, but a $20,000 incremental cost saving will be realized. 1 Thus, alternative B will produce $5,000 more net income than alternative A. Incremental analysis sometimes involves changes that at first glance might seem contrary to your intuition. For example, sometimes variable costs do not change under the alternative courses of action. Also, sometimes fixed costs
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Unformatted text preview: do change. For example, direct labor, normally a variable cost, is not an incremental cost in deciding between two new factory machines if each asset requires the same amount of direct labor. In contrast, rent expense, normally a fixed cost, is an incremental cost in a decision to continue occupancy of a building or to purchase or lease a new building. Types of Incremental Analysis A number of different types of decisions involve incremental analysis. The more common types of decisions are: 1. Accept an order at a special price. 2. Make or buy. 3. Sell or process further. 4. Retain or replace equipment. 5. Eliminate an unprofitable business segment. 6. Allocate limited resources....
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This note was uploaded on 11/08/2011 for the course ACCOUNTING ac 202 taught by Professor - during the Fall '11 term at Montgomery.

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How Incremental Analysis Works - do change. For example,...

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