50.Incremental analysis simplifies the evaluation of a decision and reduces the time needed to choosethe best course of action. However, it is only one input to the final decision. Managers also needto consider other issues, such as
which are the benefits forfeited or lost whenone alternative is chosen over another.
Objective 3: Perform incremental analysis for outsourcing decisions.
is the use of suppliers outside the organization to perform services or produce goodsthat could be performed or produced internally.
are decisions aboutwhether to make a part internally or to buy it from an external supplier. Such decisions may also be concerned with the outsourcing of operating activities.70.To focus their resources on their core competencies (i.e., the activities they perform best), manycompanies outsource nonvalue-adding activities, especially those that involve relatively lowlevels of skill (such as payroll processing or storage and distribution) or highly specializedknowledge (such as information management).80.Incremental analysis of the costs and revenues of outsourcing a product or service as opposed to producing or performing it internally helps managers identify the best alternative.
Objective 4: Perform incremental analysis for special order decisions.
Special order decisions
are decisions about whether to accept or reject special orders at prices below the normal market prices. A special order should be accepted only if it maximizes operatingincome. Like all short-run decisions, a special order decision should support the organization’sstrategic plan and tactical objectives and be based on the relevant costs and revenues, as well asqualitative factors.100.One approach to analyzing a special order decision is to compare its price with the costs of producing, packaging, and shipping the order to see if a profit can be generated. Another approachis to prepare a bid price by calculating the minimum selling price for the special order; the bid price equals the relevant costs plus an estimated profit.110.Qualitative factors that can influence a special order decision are the special order’s impact onsales to regular customers, its potential to lead the company into new sales areas, and thecustomer’s ability to maintain an ongoing relationship with the company that includes goodordering and paying practices.
Objective 5: Perform incremental analysis for segment profitability decisions.
120.The objective of analyzing a decision about segment profitability is to identify segments that havea negative segment margin. A
is a segment’s sales revenue minus its direct costs(direct variable costs and direct fixed costs traceable to the segment). These direct costs are
because if management decides to drop the segment, they will be eliminated; because they vary among segments, they are relevant to the decision. If a segment has a positivesegment margin (i.e., if the segment’s revenue is greater than its direct costs), the segment should be kept. If a segment has a negative segment margin (i.e., if its revenue is less than its directcosts), it should be dropped. Certain costs will occur regardless of the decision; because thesecosts are unavoidable and are common to all alternatives, they are excluded from the calculationof the segment margin.130.An analysis of segment profitability includes the preparation of a segmented income statementusing variable costing to identify variable and fixed costs.