Question

What is incremental analysis, and what information is relevant to the process?

Please list the 5 types of incremental analysis situations, and provide an example of each?

What non-financial or qualitative information should be considered with each of the 5 situations?

Answer 1

Incremental analysis is a decision-making technique used in business to determine the true cost difference between alternatives. Also called the relevant cost approach, marginal analysis, or differential analysis, incremental analysis disregards any sunk cost or past cost. Incremental analysis is useful for business strategy including the decision to self-produce or outsource a function. Few examples of incremental analysis include:

• Accepting additional business.

• Making or buying parts or products.
• Selling products or processing them further.

• Eliminating a segment.
• Allocating scarce resources (sales mix)

Types of Incremental Analysis

Incremental analysis accounting can be used in many business situations including the following.

1. Accept or reject decision
2. Sell or process further decision
3. Make or buy decision
4. Repair or replace decision
5. Keep or drop decision

Qualitative factors may include:

(1) effect on employee morale, schedules and other internal elements;

(2) relationships with and commitments to suppliers;

(3) effect on present and future customers;

(4) long-term future effect on profitability.