Incremental Analysis and Relevant Cost Information for Decision Making

Incremental Analysis is a decision-making technique used to evaluate the financial impact of a proposed action. It focuses on the changes in costs and revenues that will occur if the action is taken.

Relevant Costs are those costs that are directly affected by the decision being made. They are future-oriented and should be considered when making a choice.

Example: Expanding Your Training Center

Let's say you're considering expanding your training center by adding a new course on data science. To make an informed decision, you'll need to conduct an incremental analysis.

Step 1: Identify Relevant Costs

• Additional Costs:
• Sunk Costs: These are costs that have already been incurred and cannot be recovered. They are not relevant for decision-making. 1 For example, the cost of your existing training center building would be a sunk cost.

Step 2: Identify Relevant Revenues

• Expected Revenue:

Step 3: Calculate Incremental Profit

• Incremental Profit = Incremental Revenue - Incremental Costs

Example Calculation:

• Incremental Revenue: $100,000 per year
• Incremental Costs: $70,000 per year
• Incremental Profit: $30,000 per year

Based on this analysis, expanding your training center with the data science course appears to be a profitable decision.