7 2: Using Differential Analysis to Make Decisions Business LibreTexts

An opportunity cost is the benefit foregone when one alternative is selected over another. Keyboard, Inc., a manufacturer of pianos, typically sells each of its pianos for $1,480. The cost of manufacturing and marketing one piano at the company’s usual https://www.bookkeeping-reviews.com/ monthly volume of 6,000 units is shown. Management’s goal is to loosen the constraint by providing more labor hours to department 4. For example, management may decide to move employees from departments 1, 2, and 3 to the quality testing department.

Incremental Cost Decisions

  1. In selecting a price for a product, the goal is to select the price at which total future revenues exceed total future costs by the greatest amount, thus maximizing income.
  2. The three main concepts are relevant cost, sunk cost, and opportunity cost.
  3. Differential analysis can determine whether companies should sell their products at prices below regular levels.

If that was the case, we could disregard that option to save us time in our decision making process. Quicko’s is approached by a local restaurant that would like to have 20,000 flyers copied. The restaurant asks xero accounting software review for 2021 Quicko’s to produce the flyers for 7 cents a copy rather than the standard price of 8 cents. Quicko’s can produce up to 130,000 copies a month, so the special order will not affect regular customer sales.

Definition of Differential Cost and Incremental Cost

Incremental Cost: Definition, How To Calculate, And Examples