DescriptionManagers have to make many decisions about how to run their companies. These decisions can include determining which products and services to provide, where to buy raw materials and component parts, how to price their offerings, how to distribute their goods, and who to hire and fire. To help make sure they are making smart choices, business owners and managers often analyze relevant data to guide how they make their decisions. They use this differential analysis as they focus on key decisions, such as how much to spend, which product lines to create, and whether to accept special orders.
At A Glance
- Six key concepts guide managers who use differential analysis.
- A manager must know the relevant costs in order to make proper decisions, such as which options make the most sense to use when promoting a business.
- Differential analysis focuses only on relevant costs.
- Some costs are not relevant to the decision being made.
- Differential analysis is an effective tool when a company is deciding whether to add a product or drop one.
- Managers often use differential analysis to decide whether to take on a special order.
- As companies make decisions, they must consider the effects of volume trade-offs, constraints, and bottlenecks.
- Differential analysis helps managers make decisions when resources are constrained.