Question

Continuing with the company selected in Unit 2, think about the types of financial data that would be included and excluded in the differential analysis. Propose which specific revenues and costs should be considered in an evaluation to drop or keep a:

• Customer
• Product line

In addition, explain sunk and opportunity costs as they relate to your selected company. Should these costs be considered in differential analysis? Why or why not?

The company is Caterpillar
Data form unit 2 :
Variable cost : $400,000,000
Fixed Cost : $25,000,000  
Sales Cost : $1,000,000,000
Contribution Margin: $600,000,000
Contribution Margin Ratio: 60%

Answer 1

In differential analysis basically the cost which are to be incurred for which it can be avoid if a different product is manufactured this type of cost are to be included in different analysis.

Also those cost which do not play any role in decision making are to be excluded from the differential analysis. In the given question variable cost as well as sales cost are those financial data that are to be included in the differential analysis where is the fixed cost is to be excluded in the differential analysis.

Sunk cost of those cost which have incurred in past and do not have any relevance in the present as well as do not have any impact in the future. Opportunity cost at doorstep of cost which is the company have to wear in the situation was the companies to choose between two options and for going one of the option will reduce its income and that will be the opportunity cost for the other product manufactured.

Basically sunk cost should not be considered in differential analysis as these do not have any impact in the present situation as well as in the future situation where is on the other and opportunity cost should be considered the differential analysis as it will give a better analysis about which product is more beneficial and profitable for the company .