Managers must often decide between two or more alternatives. Differential analysis is used in decision making. When using differential analysis, it is important to only include those amounts that are different between the alternatives. Differential cost is subtracted from differential revenue to determine differential income/loss.
Differential analysis requires that relevant costs must be identified. When determining which costs are relevant, which of the following statements is true?
SelectAll fixed costs are irrelevant.All mixed costs are relevant.All variable costs are relevant.Relevancy must be determined on a case-by-case basis.Correct 1 of Item 1
For example, a manufacturing company may have a segment or product that is operating at a loss. The decision to keep the segment/product or discontinue it is called a keep-or-drop decision and uses differential analysis to assist in the decision-making process.
Differential analysis is only one step in deciding to keep or drop the segment or product. Management must also take into consideration nonquantitative data. If the company drops a product, will it affect the sales of other products? If employees are laid off or terminated, will it affect employee morale? These nonquantitative issues will influence the success or failure of a keep-or-drop decision.