Question

Describe incremental revenue and expense.

Answer 1

Incremental Revenue is the sales associated with an additional quantity sold. It is the change in the companies total revenue resulting from increase or decrease in units sold. The concept of incremental revenue/incremental cost is extremely important in the field of management accounting. The decisions relating to a new order at reduced price, launch of new product in existing portfolio, impact of effectiveness of a Marketing campaign etc all involves analysis of incremental revenue.

The calculation of incremental revenue involves establishing a baseline revenue level and then measuring changes from that point. For example, if current year’s sale is $50,000.00 and with a proposed marketing campaign in upcoming year it is expected a total sale of $65,000.00 can be attained, then we shall have an incremental revenue of $15,000($65,000-$50,000) owing to marketing campaign.

Incremental cost: In contrast to Incremental Revenue, incremental cost is associated with additional units produced/sold. It is the change in per unit cost as a result of change in total production and sales. Product cost involves both variable and fixed cost components. Total Fixed cost being a period cost remains constant irrespective of units produced. However per unit fixed cost diminishes as a result of increased production, this is because the fixed cost is getting distributed in a relatively larger pool of units produced.

Variable and fixed costs will influence the incremental costs. A fixed building lease for example, does not change in price when you increase production. The fixed cost will reduce against the cost of each unit manufactured, thus increasing the profit margin for that product. Variable costs change according to production. A specific material used in production is a variable cost because the price changes as the production increases.