Managerial Accounting: Tools For Business Decision-Making

Managerial Accounting
Tools for Business Decision-Making

Sixth Canadian Edition
Weygandt Kimmel Aly
Chapter 7
Incremental Analysis
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Copyright ©2021 John Wiley & Sons Canada, Ltd.

Learning Objectives (1 of 2)
1. Describe management’s decision-making process and
the concept of incremental analysis.
2. Identify the relevant costs in accepting an order at a
special price.
3. Identify the relevant costs in a make-or-buy decision.
4. Identify the relevant costs and revenues in deciding
whether to sell or process materials further.
Copyright ©2021 John Wiley & Sons Canada, Ltd. 2

Learning Objectives (2 of 2)
5. Identify the relevant costs in deciding whether to
retain or replace equipment.
6. Identify the relevant costs in deciding whether to
eliminate an unprofitable segment.
7. Determine the sales mix when a company has limited
resources.

Management’s Decision-Making Process
(1 of 2)
Decision: A choice between alternative courses of action
Does not always follow a set pattern or process
• Decisions vary in scope
• Decisions vary in urgency and importance
Some basic steps frequently used are:
Accounting plays a role in Management’s decision-making process in Steps 2 and 4

Management’s Decision-Making Process
(2 of 2)
• Management must consider both financial and non-financial
information in the process
o Financial information (or quantitative data)
• Data that can be measured
• Revenues and costs
• Overall profitability
o Nonfinancial information (or qualitative data)
• Data that cannot be numerically measured
• Effect of decision on employee turnover
• Environment
• Overall image of company

Management’s Decision-Making
Incremental Analysis Approach
• Process of identifying financial data that will change under
alternative actions
o Identifies probable effects of decisions on future cash flows
and earnings
o Also referred to as differential analysis
• Data relevant to a decision are the data that vary between
alternatives
o Both costs and revenues may vary, or
o Only revenues may vary, or
o Only costs may vary

Incremental Analysis Example (1 of 2)
Alternative B is being compared to Alternative A
Basic approach in incremental analysis

• Column D shows the incremental change to dollar
amounts
• The financial decision criteria is to accept the alternative
action with the greatest positive impact on net income

Incremental Analysis Example (2 of 2)
• Incremental revenue is $15,000 less under Alternative B

• Incremental cost savings of $20,000 is realized under
Alternative B
• Alternative B produces $5,000 more net income
• Alternative B is selected over Alternative A

Terminology
• Relevant cost: (1) costs and revenues that differ for
each alternative, and (2) costs and revenues that will
occur in the future.
• Opportunity cost: The cost of giving up the
opportunity to benefit from some other action.
• Sunk cost: Costs that have already been incurred and
will not be changed or avoided by any future decision.
Sunk costs are never considered to be relevant costs.

• Time value of money is never considered as part of
these decisions
• Qualitative factors must always be part of the decision
process
o Example: shutting down a product line has an
immeasurable impact on the local economy and
community

Let’s Review 1
When making decisions, a general rule would be that
a. fixed costs are always relevant.
b. variable (unit-level) costs are always irrelevant.
c. future costs and revenues are always relevant.
d. future revenues and costs that differ between
alternatives are always relevant.

Let’s Review 1: Solution
When making decisions, a general rule would be that
a. fixed costs are always relevant.
b. variable (unit-level) costs are always irrelevant.
c. future costs and revenues are always relevant.
d. future revenues and costs that differ between
alternatives are always relevant. (correct answer)

Let’s Review 2
A local business is considering the purchase of a new
computer system with advanced networking capability, at
a cost of $300,000. A new computer system was installed
last year at a cost of $150,000. The cost of the existing
computer system is an example of a(n)
a. sunk cost.
b. relevant cost.
c. differential cost.
d. opportunity cost.

A local business is considering the purchase of a new
computer system with advanced networking capability, at
a cost of $300,000. A new computer system was installed
last year at a cost of $150,000. The cost of the existing
computer system is an example of a(n)
a. sunk cost. (correct answer)
b. relevant cost.
c. differential cost.
d. opportunity cost.

Types of Incremental Analysis
1. Accept an order at a special price
2. Make or buy component parts or finished products
3. Sell products or process further
4. Retain or replace equipment
5. Eliminate or retain an unprofitable business segment
6. Allocate limited resources

Accept an Order at a Special Price (1 of 2)
• Management considers an order (often a one-time
order) at a special price.
• Decision criteria: a special order is accepted if the
contribution margin (or income) is positive
o The special order increases the company’s overall net
income

Accept an Order at a Special Price (2 of 2)
Key assumptions:
• Sales of the company’s other product lines would not be
affected by special order
o For example; unit sales of other product lines will not
change
• Existing customers will not expect the same reduced
selling price
o The company is not operating at full capacity
• The company would continue to operate within the relevant
range even with the special order, making existing fixed costs
not relevant
Accept an Order at a Special Price – Example (1 of 3)
• Customer offers to buy a special order of 2,000 blenders at
$11 per unit from Sunbelt.
o No effect on normal sales; sufficient plant capacity
o Operating at 80% capacity = 100,000 units
o Current fixed manufacturing costs = $400,000 or $4 per unit
o Variable manufacturing cost = $8 per unit
o Normal selling prince = $20 per unit
• Based strictly on total cost of $12 per unit ($8 + $4), reject
offer as cost exceeds selling price of $11

• No change in fixed costs as Sunbelt will continue to
operate within existing capacity – thus fixed costs are
not relevant
• Only total variable costs change – thus they are
relevant

Incremental analysis – accepting an order at a special price

• Revenue increases $22,000; variable costs increase by
$16,000;
• Thus, net income increases by $6,000
Decision: Accept the offer. Net income will increase by
$6,000.
Let’s Review 3
Of several types of decisions that involve incremental
analysis, the most common are:
a. accept an order at a special price.
b. make or buy component parts.
c. sell products or process further.
d. all of the above.

Of several types of decisions that involve incremental
analysis, the most common are:
a. accept an order at a special price.
b. make or buy component parts.
c. sell products or process further.
d. all of the above. (correct answer)

Let’s Review 4
Cosmic Cosmetics (CC) has capacity to produce and sell 200,000
units per month. Costs at this level are provided in the table below.
CC currently sells 175,000 units per month, at $1.55 per unit. Pur
Skinn has contacted CC about purchasing 15,000 units at $1.05
each. Current sales would not be affected by the special order, and
variable marketing costs would not be incurred on the special
order. What is CCs’ change in net income if the order is accepted?
Per Unit Costs:
a. $9,375 increase Prime Costs $0.350
b. $9,375 decrease Variable manufacturing overhead

Variable marketing
0.075
0.250
c. $5,625 increase Total Costs:

Fixed manufacturing overhead $20,000
d. $5,625 decrease Fixed marketing $24,000

Cosmic Cosmetics (CC) has capacity to produce and sell 200,000
units per month. Costs at this level are provided in the table below.
CC currently sells 175,000 units per month, at $1.55 per unit. Pur
Skinn has contacted CC about purchasing 15,000 units at $1.05
each. Current sales would not be affected by the special order, and
variable marketing costs would not be incurred on the special
order. What is CCs’ change in net income if the order is accepted?
Per Unit Costs:
a. $9,375 increase (correct Prime Costs $0.350
answer) Variable manufacturing overhead 0.075
Variable marketing 0.250
b. $9,375 decrease Total Costs:
Fixed manufacturing overhead $20,000
c. $5,625 increase Fixed marketing $24,000
d. $5,625 decrease
Make or Buy (1 of 2)
• Also referred to as outsourcing
• Management considers whether to have a product
unit or product component made ‘in-house’ or made
externally and purchased
• Decision Criteria: will outsource if the total cost
savings are positive
• Qualitative factors can have a significant impact on
this decision
o Maintaining quality; environmental issues; local
community impact from any layoffs
Make or Buy (2 of 2)
Advantages:
• Frees up capacity for other uses
• Shifts production risks to the supplier
Disadvantages:
• Potential loss of quality control
• Difficult to bring production back if needed
• Making sure there is adequate materials and expertise

Incremental Analysis: Make or Buy -
Example
• Outsourcing: The decision to buy parts or services rather than
making them
• Baron Co. incurs the following costs to make 25,000 switches:
Annual product cost data

• Switches can be purchased for $8 per switch ($200,000)
o Eliminates all variable costs and $10,000 of fixed costs;
however, $50,000 of fixed costs remain
Incremental Analysis Make or Buy -
Example: (cont.)
Incremental analysis—make or buy

• Based on analysis of costs under both alternatives:
Purchasing adds $25,000 to cost of switches
Decision: Continue to make switches.
Opportunity Costs (1 of 2)
• Opportunity cost – the potential benefit that may be
obtained from following an alternative course of
action
• Example: Assume that buying the switches allows
Baron to use the released capacity to generate
$38,000 additional income.
• The Opportunity Cost is the $38,000 income that
Baron will lose if they continue to make the switches

Opportunity Costs (2 of 2)
Incremental analysis—make or buy, with opportunity cost

Decision: Based on the analysis, Baron should buy the
switches as the company will earn an additional $13,000 in
Net Income.

Let’s Review 5
In a make-or-buy decision, the relevant costs are:
a. the manufacturing costs that will be saved.
b. the purchase price of the units.
c. opportunity costs.
d. all of the above.

In a make-or-buy decision, the relevant costs are:
a. the manufacturing costs that will be saved.
b. the purchase price of the units.
c. opportunity costs.
d. all of the above. (correct answer)

Let’s Review 6
DCR Ltd. manufactures part XJ14L used in several of its engine
models. Monthly per unit production costs for 1,000 units are
provided in the table below.
It is estimated that 10% of the fixed overhead costs will no longer
be incurred if the company buys XJ14L from an outside supplier.
The cost to purchase XJ14L from the supplier is $85 per unit. If DCR
purchases 1,000 XJ14L parts from the outside supplier per month,
its monthly net income will
a. increase by $13,000. Direct materials $ 40.00
Direct labour 10.00
b. increase by $15,000. Variable overhead costs 30.00
c. decrease by $5,000. Fixed overhead costs 20.00
Total costs $100.00
d. decrease by $3,000.
DCR Ltd. manufactures part XJ14L used in several of its engine
models. Monthly per unit production costs for 1,000 units are
provided in the table below.
It is estimated that 10% of the fixed overhead costs will no longer
be incurred if the company buys XJ14L from an outside supplier.
The cost to purchase XJ14L from the supplier is $85 per unit. If DCR
purchases 1,000 XJ14L parts from the outside supplier per month,
its monthly net income will
a. increase by $13,000. Direct materials $ 40.00
Direct labour 10.00
b. increase by $15,000. Variable overhead costs 30.00
Fixed overhead costs 20.00
c. decrease by $5,000. Total costs $100.00
d. decrease by $3,000. (correct
answer)
Incremental Analysis: Sell or Process
Further (1 of 2)
• Management may have to decide, at a given point in
production, whether to sell a product now or to
process the unit further and then sell the unit at a
higher price
• If processed further, the selling price will increase as
will production costs
• Decision Criteria:
o Process further as long as the incremental revenue
exceeds the incremental processing costs

Incremental Analysis: Sell or Process
Further (2 of 2)
• Any costs incurred up to the point of further processing
are not relevant to this decision
• Two decision scenarios
1. Single product case: The company produces only one
product that can be sold as is or processed further
2. Multiple product case: The company produces multiple
products simultaneously from a single raw material
(referred to as joint products)
• Some of the products can only be sold as is;
• Some of the products may be sold as is or processed further
and then sold

Sell or Process Further
Single Product Case Example (1 of 3)
Woodmaster manufacturers a single product – a table.

Each unfinished table sells for $50 per table.
Woodmaster currently has unused capacity that could be
used to process each table further and sell as a finished
table for $60 per table. Per unit cost information for the
unfinished table is presented in the table.
Each unfinished table provides net income of $50 − $35 = $15

• Relevant per unit costs of finishing a table:
o Direct materials increase by $2
o Direct labour increases by $4
o Variable manufacturing overhead costs increase by
$2.40 (60% of the direct labour increase)
o Fixed manufacturing costs will remain unchanged
• Should Woodmaster sell the table as unfinished with

net income of $15 per table; or should the tables be
finished (processed further) and sold for $60 per
table?
Incremental analysis—sell or process further

Decision: Process further. Incremental revenue $10 exceeds
incremental processing costs $8.40. Net income increases by
$1.60 per unit.

Sell or Process Further: Multiple-
Product Case (1 of 2)
• Applied when multiple products are produced simultaneously,
using a single raw material and a common production process
o Referred to as Joint products
o Products become identifiable from each other at the split-off
point
o Cost incurred prior to the split-off point are not relevant to the
sell or process-further decision
• Examples of joint products
o Petroleum – gasoline, lubricating oil, kerosene
o Meat Packing – meat, hides, bones
o Dairy - whole milk, skim milk, ice cream

Sell or Process Further: Multiple-
Product Case (2 of 2)
Marais Creamery
• Raw milk goes through the common process and the
main products – Cream and Skim Milk are produced
• The joint costs incurred in the common process are
not relevant to the decision of sell or process further
o They will be incurred whether Marais Creamery
decides to sell their main products as is or process
them further

Multiple-Product Case Example (1 of 5)
Marais Creamery
Total joint costs are $14,000 Additional processing costs:

Allocated to main products: Cottage Cheese: $10,000
Cream: $9,000 Condensed Milk: $8,000
Skim Milk: $5,000
Joint-production process and costs —Marais Creamery
Marais Creamery
The first decision is whether to sell cream or process further
into cottage cheese. An incremental analysis is prepared:
The joint cost of $9,000 that is allocated to the cream is not

included in this decision. It is not relevant because it is a sunk cost.
Marais Creamery
Analysis of whether to sell cream or make cottage cheese

Decision: Do not process the cream further. Incremental
revenue $8,000 is less than incremental costs $10,000;
Income decreases by $2,000.

Marais Creamery
The next decision is whether to sell skim milk or process
further into condensed milk. An incremental analysis is
prepared:
As with the cream, the joint cost of $5,000 allocated to skim milk is
not included in the decision.
Marais Creamery Decision
Analysis of whether to sell skim milk or process into condensed milk

Decision: Process the skim milk further. Incremental revenue
$15,000 exceeds incremental costs $8,000; Income increases by
$7,000.
Let’s Review 7
The decision rule in a sell or process further decision is to
process further so long as the incremental revenue from
processing is more than the:
a. incremental processing costs.
b. variable processing costs.
c. fixed processing costs.
d. no correct answer given.

The decision rule in a sell or process further decision is to
process further so long as the incremental revenue from
processing is more than the:
a. incremental processing costs. (correct answer)
b. variable processing costs.
c. fixed processing costs.
d. no correct answer given.

Let’s Review 8
Which of the following is not a qualitative factor?
a. Employee satisfaction
b. Quality control process
c. Customer satisfaction
d. Cost of labour per unit

Which of the following is not a qualitative factor?
a. Employee satisfaction
b. Quality control process
c. Customer satisfaction
d. Cost of labour per unit (correct answer)

Let’s Review 9
Venture Ltd. manufactures Alpha and Beta from a joint process
(cost = $80,000). Five thousand kg of Alpha can be sold at split-off
for $20 per kg. or processed further at an additional cost of
$20,000 and then sold for $25 per kg. Ten thousand kg. of Beta can
be sold at split-off for $15 per kg. or processed further at an
additional cost of $20,000 and sold for $16 per kg. If Venture
decides to process Alpha beyond the split-off point, income will:
a. Increase by $5,000
b. Decrease by $10,000
c. Decrease by $5,000
d. Increase by $10,000

Venture Ltd. manufactures Alpha and Beta from a joint process
(cost = $80,000). Five thousand kg of Alpha can be sold at split-off
for $20 per kg. or processed further at an additional cost of
$20,000 and then sold for $25 per kg. Ten thousand kg. of Beta can
be sold at split-off for $15 per kg. or processed further at an
additional cost of $20,000 and sold for $16 per kg. If Venture
decides to process Alpha beyond the split-off point, income will:
a. Increase by $5,000 (correct answer)
b. Decrease by $10,000
d. Increase by $10,000

Retain or Replace Equipment (1 of 2)
• At some point in time management must make the
decision to either keep or replace a capital or long-
term asset.
• Decision Criteria:
o Replace the asset if the new asset increases net
income.
o Time value of money, capital cost allowance and
income taxes are outside the scope of this chapter

Retain or Replace Equipment (2 of 2)
Terminology:
• Book value: Original cost of asset net of accumulated
depreciation; a sunk cost and not relevant to the
decision-making process
• Salvage value: The estimated amount that might be
realized when the asset is sold at the end of its useful
life
• Useful life: How long the company can expect to
generate revenues from the asset

Retain or Replace Equipment
Retain or Replace Equipment Example (1 of 2)
Jeffcoat Company is considering replacing one of their
machines with a newer machine. If the new machine is
purchased variable manufacturing costs will decrease
from $160,000 to $125,000 per year. Other information:
Old Machine New Machine

Book value $40,000
Cost of new machine $120,000
Remaining useful life 4 years 4 years
Salvage value $5,000 -0-

Retain or Replace Equipment
Retain or Replace Equipment Example (2 of 2)
Incremental analysis—retain or replace equipment

Decision: Replace equipment.
Lower variable manufacturing costs more than offsets the cost of
new equipment. The book value of the old machine does not
affect the decision.
Let’s Review 10
What is the salvage value of old equipment considered to
be?
a. A relevant cost
b. A non-incremental cost
c. An opportunity cost
d. A cost that is not differential

What is the salvage value of old equipment considered to
be?
a. A relevant cost (correct answer)
b. A non-incremental cost
c. An opportunity cost
d. A cost that is not differential

Eliminate an Unprofitable Product or
Segment
• Management may have to decide to discontinue any of:
o Product or product line
o Segment or division
o Customer
• Decision Criteria: Drop the item if that will improve overall or total
net income.
• Key is the proper handling of fixed costs and determining if such
costs are avoidable or unavoidable
o Avoidable fixed cost: cost that will no longer be incurred by the
company
o Unavoidable fixed cost: cost that will continue to be incurred, and must
be allocated to the remaining products, segments or customers
Eliminate an Unprofitable Product Line or Segment
• Consider effect on related product line or segment

• Fixed costs allocated to the unprofitable line or
segment must be absorbed by those that remain
• Net income may decrease when an unprofitable
product line or segment is eliminated
• Decision Criteria: Retain the product line or segment
unless the saved or eliminated fixed costs are greater
than the lost contribution margin

Eliminate an Unprofitable Product or Segment
Example: Martina Company (1 of 3)
• Currently manufacture three product lines, with sales
and costs as follows:
• Actual fixed costs will not change if the unprofitable

line is dropped.
• Should Martina Company drop the unprofitable
‘Champ’ product line?
• With no fixed cost savings, and assuming no change to
the Pro and Master sales, Net income will be:
• By dropping the Champ product line Martina will lose

the $10,000 contribution margin. With no fixed cost
savings, net income decreases by the $10,000 lost

An incremental analysis of Champ provides the same
results
Incremental analysis—eliminating an unprofitable segment

Decrease in net income is due to Champ’s contribution
margin of $10,000 that will not be realized if the segment
is discontinued. Decision: Do not eliminate Champ.
Let’s Review 11
How should that portion of fixed costs that are unavoidable
be handled when deciding whether to eliminate an
unprofitable segment?
a. They should be subtracted from the contribution margin
and if that results in a loss in income, the segment should
be eliminated.
b. They should not be considered as they are not relevant.
c. They should be allocated to other segments. If that causes
a loss in another segment, that segment should be
eliminated as well.
d. Fixed costs are never relevant.
How should that portion of fixed costs that are unavoidable
be handled when deciding whether to eliminate an
unprofitable segment?
a. They should be subtracted from the contribution margin
and if that results in a loss in income, the segment should
be eliminated.
b. They should not be considered as they are not relevant.
(correct answer)
c. They should be allocated to other segments. If that causes
a loss in another segment, that segment should be
eliminated as well.
d. Fixed costs are never relevant.
Challenge Let’s Review 12
Mackenzie Ltd. manufactures and sells two items, products A and B. The
company is considering dropping product B. It is expected that sales of product A
will increase by 30% as a result. If product B is dropped fixed costs of $2,000 will
be avoided. An income statement with both products follows.
Product A Product B Total
Sales $10,000 $8,000 $18,000
Direct materials 2,500 2,000 4,500
Direct labour 2,000 1,200 3,200
Contribution margin $5,500 4,800 10,300
Fixed costs 1,300 4,700 6,000
Operating income $ 4,200 $ 100 $ 4,300
What impact will dropping Product B have on Mackenzie’s monthly operating income?
a. Increase by $800
b. Increase by $1,980
d. Decrease by $820
Challenge Let’s Review 12: Solution
Mackenzie Ltd. manufactures and sells two items, products A and B. The
company is considering dropping product B. It is expected that sales of product A
will increase by 30% as a result. If product B is dropped fixed costs of $2,000 will
be avoided. An income statement with both products follows.
Product A Product B Total
Sales $10,000 $8,000 $18,000
Direct materials 2,500 2,000 4,500
Direct labour 2,000 1,200 3,200
Contribution margin $5,500 4,800 10,300
Fixed costs 1,300 4,700 6,000
Operating income $ 4,200 $ 100 $ 4,300
What impact will dropping Product B have on Mackenzie’s monthly operating income?
a. Increase by $800
b. Increase by $1,980
d. Decrease by $1150 (correct answer)
Allocate Limited Resources (1 of 2)
• All input resources are limited
o floor space for a retail firm
o raw material, direct labour hours, or machine capacity for a
manufacturing firm
• Management must decide which products to make and
sell to maximize net income
o With limited resources that will be those products that
maximize contribution margin per unit of limited resource
• Decision criteria: Select the product or product
combination that maximizes net income

Allocate Limited Resources
Example: Bilodeau Company (1 of 3)
• Produces two different phone cases: standard and deluxe
• Limited resource – 3,600 machine hours per month
• Contribution margin and resource usage are:
Deluxe Cases Standard Cases
Contribution margin per unit $8 $6
Machine hours required per unit 0.4 0.2
Contribution margin and machine hours

• Which product should Bilodeau Company focus on to maximize
their net income?

• Determine the contribution margin per unit of limited resource
Contribution margin per unit (a) $8 $6
Machine hours required per unit (b) ÷0.4 ÷0.2
Contribution margin per unit of limited resource [(a) ÷ (b)] $20 $30
Contribution margin per unit of limited resource

• Standard cases have higher contribution margin per unit of
limited resources
Decision: Shift sales mix to standard cases.

Allocate Limited Resources (2 of 2)
• Short term decision – focus on the product or products
that yield the greatest contribution margin per unit of
limited resource
• Longer term, can the constraint be reduced or
eliminated? Example:
o Change the contribution margin per unit of limited
resource; or
o Remove the limitation on the resource

Increase machine capacity from 3,600 to 4,200 hours
Produce Produce
Machine hours (a) 600 600
Contribution margin per unit of limited resource (b) ×$20 ×$30
Contribution margin [(a) × (b)] $12,000 $18,000
• The decision result is the same, focus on Standard cases.

• This product has the highest contribution margin per unit
of limited resource, it will always be the preferred product
so long as there is a limited number of machine hours.
Theory of Constraints
• Approach used to identify and manage constraints to
help in achieving company goals
• Requires identification of constraints
• Continual attempts to reduce or eliminate constraints

Let’s Review 13
A company that is operating at full capacity should focus
on those products that have the:
a. lowest total per-unit costs.
b. highest contribution margin per unit.
c. highest contribution margin per unit of limited
resource.
d. lowest variable cost per unit.

A company that is operating at full capacity should focus
on those products that have the:
a. lowest total per-unit costs.
b. highest contribution margin per unit.
c. highest contribution margin per unit of limited
resource. (correct answer)
d. lowest variable cost per unit.

Let’s Review 14
Smith Mfg., produces various goods and has a limited number of machining
hours available. The following data apply to Product AJ405:
Sales price per unit: $9.60
Variable cost per unit: $6.20
Machine time per unit: 4 hours
Management is deciding whether to limit the production of Product AJ405 or
focus on other products. Which of the following amounts should management
focus on when making their decision?
a. $0.85.
b. $2.40.
c. $3.40.
d. $6.20.

Smith Mfg., produces various goods and has a limited number of machining
hours available. The following data apply to Product AJ405:
Sales price per unit: $9.60
Variable cost per unit: $6.20
Machine time per unit: 4 hours
Management is deciding whether to limit the production of Product AJ405 or
focus on other products. Which of the following amounts should management
focus on when making their decision?
a. $0.85. (correct answer)
b. $2.40.
c. $3.40.
d. $6.20.

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Incremental analysis – accepting an order at a special price

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b. $9,375 decrease Variable manufacturing overhead

c. $5,625 increase Total Costs:

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Annual product cost data

Incremental analysis—make or buy

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Incremental analysis—make or buy, with opportunity cost

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Woodmaster manufacturers a single product – a table.

Each unfinished table provides net income of $50 − $35 = $15

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• Should Woodmaster sell the table as unfinished with

Incremental analysis—sell or process further

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Total joint costs are $14,000 Additional processing costs:

The joint cost of $9,000 that is allocated to the cream is not

Analysis of whether to sell cream or make cottage cheese

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Analysis of whether to sell skim milk or process into condensed milk

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Old Machine New Machine

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Incremental analysis—retain or replace equipment