Question

How is incremental analysis used for decision making?

Answer 1

Incremental Analysis or differential analysis, is used to analyse the financial information needed for decision making. It identifies the relevant revenues and/or costs of each alternative and the expected impact of the alternative on future income.

Incremental analysis is a decision making technique used in business to determine the true cost difference between alternatives. Incremental analysis helps companies decide whether or not to accept a special order. This order is typically lower than its normal selling price.Incremental analysis also assists with allocating limited resources to several product lines to ensure a scare asset is used to maximum benefit.

Answer 2

Bunny Bar manufactures 10,000 units of Part XXX annually for use in its operations.  The following costs are reported:

     Direct materials         P  20,000

     Direct labor             55,000

     Variable factory overhead             45,000

     Fixed factory overhead             70,000

          TOTAL         P 190,000

Honey Biz has offered to sell to Bunny Bar 10,000 units of Part XXX annually for P18 per unit.  If Bunny accepts the offer, some of the facilities presently used to manufacture Part XXX could be rented to a third party at an annual rental of P15,000.  Additionally, P4 per unit of the fixed factory overhead applied to Part XXX would be totally eliminated.

 

REQUIRED:

1.     Show the relevant items included in each alternative of “TO MAKE” and “TO BUY”.

2.    Should Bunny Bar accept Honey Biz’s offer?  Why?