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It is a technique used for arriving at managerial decisions in which only cost and income differences between alternative courses of action are taken into consideration. This technique is applicable to situations where fixed costs alter. This technique emphasizes on comparing the incremental costs with incremental revenues for taking a managerial decision. So long as the incremental revenue is greater than incremental costs, the decision should be in favour of the proposal.
The areas in which the above techniques of cost analysis can be used for making managerial decisions are:
(i) Whether to process a product further or not.
Many companies manufacture products which can be sold or subjected to further processing. It is also possible that waste emanating from one operation of a factory can be sold as such or sold after further processing in the company’s plant.
Examples of such companies are: meat processing, manufacture of copper or aluminum, etc. In such cases, the matter for consideration is whether the incremental revenue arising from the processing of the product further is sufficient to cover the incremental cost involved in such additional processing and still leave a contribution towards profit.
(ii) Dropping or adding a product line.
(iii) Making the best use of the investment made.
(iv) Acceptance of an additional order from a special customer at lower than existing price.
(v) Opening of new sales territory and branch.
(vii) Make or Buy decisions.
(viii) Submitting tenders
(ix) Lease or buy decisions
(x) Equipment replacement decision.
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