Chapter 14: Incremental Analysis

Introduction to Incremental Analysis

• Focus on decision-making process.
• Involves evaluating options that add to the current situation.
• Managers are responsible for making impactful decisions.

Steps in Decision Making Process

1. Identify the problem.
2. Assign responsibility.
3. Determine and evaluate possible courses of action.
   • Focus on evaluating options.
4. Make a decision.
5. Review the decision.

Considerations in Decision Making

• Financial Considerations
  • Easier to quantify.
  • Involves evaluating potential profits or costs.
• Non-Financial Considerations
  • Includes factors like DEI (Diversity, Equity, Inclusion) and corporate social responsibility.
  • Impact on employee turnover, morale, environment, and company reputation.

Balancing Financial and Non-Financial Factors

• Importance of weighing both types of considerations.
• Financial factors are more quantifiable and the focus of the chapter.

Evaluating Alternatives

• Focus on changes in revenues and costs.
• Decision-making revolves around which option generates more profit.
• Incremental analysis involves evaluating different scenarios to maximize profits.

Example of Alternatives Evaluation

• Compare alternative A and B based on expected costs and revenues.
• Alternative with higher net income (e.g., $5,000 more) is preferred unless non-financial concerns exist.

Key Concepts in Incremental Analysis

1. Relevant Cost
   • Costs or revenues that differ between alternatives.
   • Non-relevant costs (e.g., fixed costs) can be excluded from analysis.
2. Opportunity Cost
   • The benefit lost by choosing one option over another.
   • Exists due to limited resources.
3. Sunk Costs
   • Costs that have already been incurred and cannot be recovered.

Conclusion

• Incremental analysis helps in making informed decisions by evaluating financial impacts.
• Non-financial factors also crucial but more challenging to quantify.
• Managers need to balance these considerations for optimal decision-making.