which of the following is never considered in incremental analysis?
a. incremental revenue
b.sunk cost
c.incremental profit
d. differential costs
b. sunk cost
To determine which of the given options is never considered in incremental analysis, let's briefly review what incremental analysis is.
Incremental analysis, also known as differential analysis, is a technique used in business decision-making to evaluate the financial consequences of different alternatives. It involves comparing the costs and benefits of different options to determine which option will provide the most favorable outcome.
Now, let's analyze each option:
a. Incremental revenue: This refers to the additional revenue that will be generated by choosing a particular alternative. Incremental revenue is an essential consideration in incremental analysis as it helps assess the financial impact of different options.
b. Sunk cost: Sunk costs are costs that have already been incurred and cannot be recovered, regardless of the decision made. In incremental analysis, sunk costs are usually not considered because they are irrelevant to future decisions. The focus is on future costs and benefits rather than past expenses.
c. Incremental profit: Incremental profit, also known as differential profit, is the difference in profit between two alternatives. It takes into account the incremental revenues and incremental costs associated with each alternative. Incremental profit is a key factor in incremental analysis, as the objective is to determine which option will result in the highest incremental profit.
d. Differential costs: Differential costs, also referred to as incremental costs, are the additional costs incurred when choosing one alternative over another. These costs are compared to the incremental revenue to determine whether the alternative is financially viable. Differential costs play a crucial role in incremental analysis.
Based on the explanations given above, the option that is never considered in incremental analysis is:
b. Sunk costs
Sunk costs are irrelevant to incremental analysis as they are already incurred and cannot change regardless of the decision made. Thus, sunk costs do not impact the evaluation of different alternatives in incremental analysis.