Differential Analysis- The key to decision making

Differential Analysis- The key to decision making -...

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Differential Analysis: The Key to Decision Making I. Cost concepts for decision making a. Identifying relevant costs and benefits a.i. Costs and benefits that differ between alternatives relevant a.ii. Avoidable costs a.ii.1. Cost that can be eliminated by choosing one alternative over the other a.iii. Sunk Cost: a.iii.1. Has already been incurred, can’t avoid b. Different costs for different purposes b.i. Costs that are relevant to one isn’t to another c. Why isolate relevant costs c.i. First: c.i.1. Only rarely will enough information be available to prepare a detailed income statement for both alternative c.ii. Second c.ii.1. Mingling irrelevant costs may cause confusion and distract attention from information that’s really critical II. Adding and dropping product lines and other segments a. An illustration of cost analysis a.i. Example a.i.1. Keeping or dropping an operating line a.i.1.a. Can avoid more in fixed costs than it loses in CM overall net operating income will improve b.
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