Question

1. Explain the meaning of (a) differential revenue, (b) differential cost, and (c) differential income.
2. A company accepts incremental business at a special price that exceeds the variable cost. What other issues must the company consider in deciding whether to accept the business?
3. Cite and give credit to the author that you are citing

Answer 1

a) Differential revenue:

Differential revenue is the difference in revenue between 2 alternatives. For example in decision to sell at split off point or process further and sale the differential revenue is final sales value minus the sales value at split off point

b) Differential cost:

Differential cost is the difference in cost between 2 alternatives. It can be increase or decrease in cost. For example: in a decision to make vs. buy the differential cost is difference between cost to make vs. cost to buy

c) Differential income:

The difference between the differential revenue and differential cost is the differential income. This concept is widely used in evaluation of 2 alternatives and decision making in an organisation.

In a decision to accept special order, a company should consider qualitative factors also in addition to quantitative factors while accepting the business

· Whether the special order is one time or repetitive

· Impact on existing sales of the firm

· Perception by the customers

· Market demand and needs

· Impact on the employees and their morale

· Any opportunity cost involved in terms of loss of existing sales

· Servicing capacity and operational feasibility