Question

In what type of business decisions can incremental analysis be used? 200 words

Answer 1

Incremental analysis is a method of selecting an alternative amoung different choices or offers. It generally ignores sunk cost which means cost which was allready incurred. But it considers opportunity cost, which is the cost of leaving our opportunity.

Incremental anslysis is used mainly in following decission making processes, which involves selecting a best alternative among the offers given to us:

1) whether to manufacture the product or to buy from the market:- The cost to manufacture the product is more than the cost to buy it, then it is advisable to buy or in case it us lower if it is manufactured then better to make the product in our factory. For exampe if it costs $10 per unit to buy and $11 variable cost and $3 fixed cost per unit, fixed cost is ignored as it was sunk cost. And it will be preferrable to buy as $1 per unit is more to make the product.

2) whether the product to be sold or to continue to the next process:- The cost incurred to process the product is more than the price offered by the purchaser to purchase the semifinished product then it is preferable to sell it.

3) whether to repair the old asset or to replace new one:- The net incomes form new asset and its life period, salvage value and repair cost of existing asset and its in flow of net incomes and balance life of old asset is taken into consideration to take decission regarding whether to repair or replace.

4) Allocation of scarce resources among different alternatives:- Allocating limited resources among multiple alternatives should be based on present value of cash inflows or Net present value of the alternative projects. Whose NPV is positive and more shall be selected among different alternatives.

5) Whether to continue or stop a particular product line or a business line:- Based on the expected net income from that product line it is possible to generate income in future the it shsll be continued. If it is found that, loss may occur if the line is continued the its better to close that particular line.

These are some of the vital business decissions taken by using incremental analysis.