Question

Identify decisions from your personal experiences that fit under one of the differential analysis categories. In order to earn the full points, please first identify the category, then describe in detail the costs (or revenues depending on your analysis) associated with your analysis and what decision you made based off of the nominal data and perhaps a sensitivity analysis. For full points, you must include cost information relating to your final decision.

Answer 1

DIFFERENTIAL ANALYSIS:-under the differential analysis we consider the different potential solutions for a particular business opportunity, to determine which solution is most cost effective .

EXAMPLES OF DIFFERENTIAL ANALYSIS:-

one such decision of diifferential analysis , is to make or buy decision ( outsourcing decision from financial point of view) for example :- in case of overseas facility if the organisation manufacture the products ,it could take the advantage of cheaper labor options but at the same time shipping and managing overseas operations results in more costs. therefore in order to decide the best option analysis of costs of both alternatives need to be considered.

LETS TAKE A PRACTICAL EXAMPLE TO CLARIFY OUR CONCEPTS:-

lets say the estimated costs of producing 1000 units of a product are as follows:-

direct material @10 per unit	10000
direct labor @ 7 per unit	7000
variable overheads @8 per unit	8000
fixed overheads@12 per unit	12000
total cost @ 37	37000

if the same product is purchased from the market @ 28 per unit than 30% of the fixed overheads will be saved

i.e 1000*28= 28000 outsourcing / buy the product

in case of production costs shall be :-

direct material = 10000

direct labor =7000

variable overheads=8000

relevant fixed overheads=3600

total relevant costs=28600

* in this example it is better to buy the product because savings in relevant costs is coming out to be 600