How did Miss Vargas Prepared The Incremental Analysis?
The study made by Miss Vargas shows the comparison between two net income results of the Mickey Bicycle Manufacturing, Inc.: Under the two options considered, the decision will be to reject or accept the offer of Howard Trading in the production of 1,000 units of Mickey Bicycle spare parts: The accountant made two columns. One column shows the net income If the company rejects the offer, and the other one shows the net income if Mickey accepts the offer.
Let us take a look at the incremental analysis, the basis of the decision made by CEO Stephens.
Reject / Accept Difference
Increase / (Decrease)
Sales $87,500, $102,500, $15,000
Less: Costs and Expenses:
Materials $10,500, $13,500, $3,000
Labor $7,000, $9,000, $2,000
Variable $10,500, $13,500, $3,000
Fixed $7,500, $7,500, 0
Selling and Administrative:
Variable $7,000, $7,000, 0
Fixed $11,250, $11,250, 0
Total Costs and Expenses $53,750, $61,750, $8,000
Income $33,750, $40,750, $7,000
The incremental analysis shown above depicts that the differences in revenues and costs are the most important figures to consider in making the decision. Based on the above illustration, we can say that if the company accepts the special order, its total revenue will be increased by $15,000. Though cost increases by $8,000, the incremental revenue will still be higher than the incremental costs, hence, the company gets an additional profit of $7,000; that is, if the special order is accepted.
The above format can be presented in another way below:
Incremental revenue (1,000 units multiplied by $15) $15,000
Less: Incremental costs:
Materials (1,000 units multiplied by $3) $3,000
Labor (1,000 units multiplied by $2) $2,000
Variable Overhead (1,000 multiplied by $3) $3,000 $8,000
Incremental Profit $7,000
Note that some cost items like selling, administrative expenses, and fixed overhead costs are not included in the analysis. This is because these costs are not expected to change in the future, regardless of whether the special order is accepted or rejected. Hence, these items cannot influence, in any way, the decision to be made.
Only those costs that are expected to change in the future, like the variable costs, are included in the analysis since those items are relevant in making the decisions. Therefore, the analyst should identify relevant items, particularlyrelevant cost, in order to facilitate the decision making.