I have an incrememntal analysis accounting question. I\'m in a group project in

Question

I have an incrememntal analysis accounting question.

I'm in a group project in which we need to make up a story for incremental analysis. The story that my group apparently settled on involved completely getting rid of one product and replacing it with another. The second product costs a decent amount to buy the equipment for, but will increase profits and decrease labor hours over time. For more information, the first product is really just a machine and materials that take a long time, while the new type of machine would be faster and completely replace the old ones.

In trying to do the incrememntal analysis, we need to make up the numbers of the problem, as well as do the actual analysis.

My question is, what model of incrememental analysis am I supposed to use? I know there is one model for getting rid of an unprofitable product, and one for choosing to make more of a different product. But, does it need more information in order to completely switch products? It's really the same product, just a different way of making that product.

I guess I'm asking, exactly which accounts do I need numbers for? I'm sorry if this sounds confusing, it's just that my accounting class is really vague with everything and I don't really know what I need...

Explanation / Answer

Incremental Analysis-

Incremental analysis is a technique used to evaluate different alternatives when we have to choose either. Purpose of technique is to select the best alternative among. It is also called differential analysis.

Our objective is to select the alternative giving maximum profit.

There are various circumstances where incremental analysis technique used. Examples of such circumstances are as under.

(‘1) Keep or replace decisions

(‘2) Make or buy decision

(‘3) Accept or reject offers

(‘4) Buy or lease

(‘5) Continue or discontinue decisions

Objective of technique is to identify the alternative which attracts least relevant cot or most relevant revenue.

Most Important Factor-

Most important factor while using incremental analysis is the relevant costs. Only relevant cost or revenue is identified and considered for analysis. Cost and Revenue which are same in all alternatives under question is ignored.

Important steps used in analysis-

Step-1 – Identify the revenues in alternatives and choose only differential revenue

Step-2 – Identify the cost ( fixed and variable) and consider only differential cost

Step 3- Relevant Cost- Identify the relevant cost like opportunity cost and consider in analysis. Sunk cost is totally ignored for analysis.

Decision for question asked- It is immaterial that product is new or same while doing analysis. Important is to find the difference in revenue and cost in both alternatives and include the same in analysis. The cost or revenue account where number is same in both alternatives should be ignored in the analysis.

So only those revenue and cost account will be considered in analysis where there is difference in number in both alternatives.

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