what is incremental analysis 
incremental analysis is a decision making tool used in business to determine the true cost difference between alternative business opportunities also called marginal analysis the relevant cost approach or differential analysis incremental analysis disregards any sunk cost past cost incremental analysis is useful when a company works on its business strategies including the decision to self produce or outsource a process job or function understanding incremental analysisincremental analysis is a problem solving method that applies accounting information with a focus on costs to strategic decision making the use of incremental analysis can help businesses identify the potential financial outcomes of one business action or opportunity compared to another with that information management can make better informed decisions that can affect profitability relevant costs also called incremental costs are incurred only when a particular activity has been initiated or increased non relevant sunk costs are expenses that already have been incurred because the sunk costs are present regardless of any opportunity or related decision they are not included in incremental analysis incremental analysis models include only relevant costs and typically these costs are broken into variable costs and fixed costs incremental analysis also considers opportunity costs the financial implications of a missed opportunity when choosing one alternative over another to ensure that a company is aware of and can pursue its most favorable option uses for incremental analysiscompanies use incremental analysis to decide whether to accept additional business make or buy products sell or process products further eliminate a product or service and decide how to allocate resources example of incremental analysisthe acme company sells a particular item for 300 the company pays 125 for labor 50 for materials and 25 for variable overhead selling expenses the company also allocates 50 per item for fixed overhead costs the company is not operating at capacity and will not be required to invest in equipment or overtime to accept any special order that it may receive then a special order arrives requesting the purchase of 15 items at 225 each the sum of all variable costs and fixed costs per item is 250 however the 50 of allocated fixed overhead costs are a sunk cost and are already spent the company has excess capacity and should only consider the relevant costs therefore the cost to produce the special order is 200 per item 125 50 25 the profit per item would be 25 225 200 while the company is able to make a profit on this special order the company must consider the ramifications of operating at full capacity if no excess capacity is present additional expenses to consider include investment in new fixed assets overtime labor costs and the opportunity cost of lost sales incremental analysis only focuses on the differences between particular courses of action these differences not the similarities form the basis of the analysis comparison 