How is differential analysis used in deciding whether to keep or drop product lines?

Managers often use differential analysis to determine whether to keep or drop a product line. Direct fixed costs are typically eliminated if a product line is eliminated, and are considered differential costs.

How does differential analysis analyze decisions?

Using Differential Analysis to Make Decisions

The general rule is to select the alternative with the highest differential profit. Differential analysis requires that we consider all differential revenues and costs—costs that differ from one alternative to another—when deciding between alternative courses of action.

How does differential analysis help in decision-making?

The key to effective decision making is differential analysis— focusing on the future costs and benefits that differ between the alternatives. Everything else is irrelevant and should be ignored. known as a differential cost. known as differential revenue.

Which decision factor would be most appropriate to use in deciding whether to keep or drop a product line?

When deciding whether or not to discontinue a product, the decision should include the total costs, not just per-unit costs. You should review the fixed manufacturing costs, selling costs, transportation and storage costs, customer service costs and any other cost you can tie to the product.

What does differential analysis focus on?

Differential Analysis focuses on: The costs and benefits that differ between two alternatives. A difference in cost between two alternatives is known as: Differential Cost.

What is differential analysis?

Differential analysis is a decision-making technique that examines the benefits and costs associated with each of two options and compares the net results of the two. The alternative selected is the one with the most favorable (or least unfavorable) financial impact.

What is differential analysis What are the two keys in analyzing short term business decisions?

What is differential analysis? A common approach to making short-term business decisions. In this approach, the emphasis is on the difference in operating income between the alternative approaches. Using this approach, we leave out irrelevant information- revenues and costs that will not differ between alternatives.

When should a product line be dropped?

Add or drop product line is the method which the company uses to evaluate the performance of product line (segment) before droping underperform product and focus on the best performing one. Most of the companies are highly likely to drop any product or segment which is not making any profit for the company.

What type of decision affects the product line?

Types of Product Line Decisions – Product Line Strategies

The product line decisions are (1) product line expansion, (2) product line reposition and (3) product line contraction. The marketing executive will make a variety of product line decisions over the life of a product.

What are the main criteria that need to take in to account in determining whether a cost is relevant for business decision-making?

In order to meet the criteria for relevancy, a cost must have two criteria that include they affect the future and they differ among alternatives. Other group of theorists asserted that the relevant costs are applicable to decision. Costs are relevant, if they direct the executive towards the decision.

How do you do a differential analysis?

Quote from video: Cost refer to differences between the cost of two alternatives. So so if you have two different cost then the cost must be relevant because if you if you undertake.

What is differential analysis give and example of a decision which can be made by using this?

Differential cost analysis focuses your attention on the expense side of the equation. For example, a company might engage in differential analysis in accounting when deciding where to outsource its manufacturing operations, basing the decision on the costs involved.

What data is included in differential analysis?

Differential analysis (also called incremental analysis) is a management accounting technique in which we examine only the changes in revenues, costs and profits that result from a business decision instead of creating complete income statements for each alternative.

When a department or product line is dropped?

When a department or product line is dropped, the common fixed costs which had been allocated to that department are allocated to the remaining departments or product lines. A two-stage system first allocates costs to: A) products or services and then allocates costs to departments or activities.

What is the main reason for discontinuing a product?

The most fundamental reason to discontinue a product is lack of sales. The most fundamental reason to discon- tinue a product is lack of sales. If no one is buying a product, it usually follows that a company should stop producing it and no longer offer it for sale.

How can you evaluate a product line?

Each product line should be evaluated by conducting three interviews with:

  1. the closest manager of the product line;
  2. the highest technical lead of the product line;
  3. an engineer working on the domain engineering of the product line.

Under what conditions should a company decide to drop a segment?

When deciding if a company should drop an unprofitable segment, the company should create a segment contribution margin income statement. If the contribution margin is positive, the company should consider direct and common fixed costs, what to do with freed capacity, and the effect on sales of other products.

Which of the following are ways in which to calculate the benefit of selecting one alternative?

Which of the following are ways in which to calculate the benefit of selecting one alternative over another? The difference b/w the net operating income for the 2 alternatives.

When deciding whether to sell a product at the split off point or process it further joint costs are not usually relevant because?

When deciding whether to sell a product at the split-off point or process it further, joint costs are not usually relevant because: such amounts are sunk and do not change with the decision.

Which type of costs Cannot be changed by any decision made now or in the future?

Sunk costs are the costs which have been created by a decision that was made in the past and cannot be changed by any decisions that will be made in the future. A sunk cost cannot be recovered and are considered irrelevant for future decision making.

Which of the following costs should always be considered when deciding whether to eliminate a segment?

In deciding whether to eliminate an unprofitable segment or product, the relevant costs are the variable costs that drive the contribution margin, if any, produced by the segment or product. Disposition of the segment’s or the product’s fixed expenses and opportunity cost must also be considered.

What is differential cost?

Differential cost refers to the difference between the cost of two alternative decisions. The cost occurs when a business faces several similar options, and a choice must be made by picking one option and dropping the other.