Decision Making-B (Incremental/Differential cost technique)

Question 1

Areas

Answer 1

1. Further process or not
2. Droppig or adding product line
3. MAking best use of investment made
4. Acceptance of additional offer from SPECIAL customer@LOWER than existing price
5. Opening of new sales trritory or branch
6. MAke or Buy
7. Submitting tenders
8. Lease or Buy
9. Equipment replacement

Question 2

Incremental Differential Analysis

Answer 2

Existing (Equivalent to new) situtaion

+ -

New Situation (Equivalent to existing)

Question 3

Further processing or not??

Incremental revenue from processing further

vs

Incremental cost

Answer 3

Question 4

Further Processing or Not-Example 2

Answer 4

Question 5

What is relevant when

1. Unprofitable product is dropped and related capacity left unutilzed??
2. Unprofitable product is dropped and related capacity is unutilzed for another remunerative product

Answer 5

1. Avoidable Fixed Cost (saving) vs Contribution lost from dropping [Aportioned FC becomes relevant]
2. Cont. from discontinued vs Cont from new product [as apportioned FC will remain same]

Question 6

Dropping or Adding Product Line - Example

Answer 6

Question 7

Optimization of Profit - Under Limiting factor analysis

Answer 7

Question 8

OPtimizing Investment Plan

through incremental analysis

Answer 8

Increase the total investment by increments till

Change rate=Change (incremental) return/Incremental investment

If change rate>required rate

Acceptable

Question 9

OPtimizing Investment Plan-Example

Answer 9

Question 10

Decision making using cash flow technique

Answer 10