Question

In a "Differential Analysis, whether in the context of "Special Pricing", "Make-It or Buy-It" or "Add or Drop a Product", what is the most important consideration?:

a) The total costs of the alternative

b) The total revenues from the alternative

c) Whether the alternative yields a positive contribution margin

d) The total fixed costs of the alternative

Answer 1

For the decisions like "special pricing" or "make it or buy it" or "add or drop product" in differential analysis, we consider cost and revenues both for the alternatives.

As it is differential analysis only differential amount is considered i.e only the changes in cost, revenue and profit.

So most important consideration is a positive contribution margin.

Total cost also includes fixed cost and fixed cost is not an additional cost and hence should not be considered for decision making here.

Total revenue only will not provide complete analysis for the decision.The cost of alternatives should also be considered.

Total fixed cost is not an additional cost and hence it should not be considered.

So the most important consideration is contribution margin as it consides the revenue and also the variable cost which is an additional cost.

So the answer is option 'C' i.e whether the alternative yields a positive contribution margin.