what is incremental revenue
represents the additional revenue one alternative generates over the other
what is a relevant benefit
incremental revenue
cost saving
what is revenue lost
the decrease in revenue of one alternative compared to the other.
what is a relevant cost / opportunity cost
revenue lost
incremental cost
what is an incremental cost
the additional cost one alternative incurs over the other.
what is cost saving
represents the reduction in cost of one alternative compared to the other
relevant benefit / avoidable cost
what are unavoidable costs
If two alternatives incur the same costs, then those costs are not considered relevant to the analysis
what is differential revenue
he difference in revenues between the two alternatives
what is a differential cost
the difference in maintenance costs between the two alternatives
what are sunk costs
represent costs that have already been incurred and would be unaffected by the ultimate decision
- irrelevant
how to make a decision based on relevant costs and benefits
- Eliminate irrelevant costs including unavoidable and sunk costs, and those costs and benefits that are the same across all alternatives.
- Make the decision based on an analysis of the relevant costs and benefits remaining.
possible scenarios:
- keep or drop business segment
- move business location
- accept or reject special order
what are the relevant costs when deciding to keep or drop a segment
- CM lost on discontinued segment = loss on revenue - savings for variable costs
what are the relevant benefits when deciding to keep or drop a business segment
- fixed costs avoided when discontinued
- contribution margin gained on other segments for repurposing resources
what are the relevant costs when deciding on a new building
- incremental costs = variable and fixed costs of each location
- opportunity costs = forgone sales from relocation
what are the relevant benefits when deciding on a new location
- incremental revenues = new sales in a new place
- variable and fixed costs avoided when the lease is terminated
what is a special order
refers to one that is not within the parameters of what the company would consider normal business operations and is not recurring
what are the relevant costs when considering a special order
- Incremental costs, including variable and fixed costs, of accepting the order.
- Opportunity costs of accepting the order, including potentially foregone sales of other products to accommodate the special order.
what are the relevant benefits when considering a special order
Incremental revenue from the order.
