Question

Krayden's Cycle Components

4. How can differential analysis be applied here to determine if it would be profitable to invest in new equipment to increase capacity for a constrained resource?

Answer 1

Differential analysis is the increase or decrease in total cost or expense or change in specific elements of cost that result from any variation in operation .while taking decision regarding new equipment is increases the capacity of constrained resources differential analysis can be applied. This represent an increase or decrease in total cost resulting out of

1.producing or distributing a few more or less of the product

2.a change in the method of production or distribution

3.an addition or deletion of a product or territory

4.selection of an additional sales channel.

AND differential analysis also applied in

1.new equipment locations decisions

2.machinery replacement decisions

3.sale at split -off further processing decisions

4.stock management and inventory control decisions

5.relevent cost analysis

6.make or buy decisions

7.operate or shut down decisions

8.Pricing Decisions

9.Acceptance of incremental orders in different situations like spare capacity full capacity etc

Through this decision we can determine new equipment is profitable to increase the capacity of constraint resources.