1. Differential Analysis, Product Pricing, and Activity-Based Costing
LO 1a – Overview of Differential Analysis

2. Differential Analysis
LO 1
Differential Analysis
Managerial decision making involves choosing between alternative courses of action.
Managerial decision making involves choosing between alternative courses of action.

3. Managerial Decision Making
LO 1
Differential Analysis
Managerial Decision Making
Step 2: Identify the alternative courses of action
Step 1: Identify the objective of the decision
Step 3: Gather relevant information and perform differential analysis.
Although the managerial decision-making process varies by the type of decision, it normally follows the five steps outlined on this slide.
Step 5: Review, analyze, and assess the results of the decision
Step 4: Make a decision

4. Bryant Restaurants, Inc.
LO 1
Differential Analysis
Bryant Restaurants, Inc.
Step 2: Identify the alternative courses of action
Use floor space for existing tables, or…
replace the tables with a salad bar.
Step 1: Identify the objective of the decision
Increase its income.
Tables Salad Bar
Revenues $100,000 $120,000
Costs 60, ,000
Income $ 40,000 $ 55,000
Step 3: Gather relevant information and perform differential analysis.
Step 5: Review, analyze, and assess the results of the decision
Step 4: Make a decision

5. Differential Analysis
LO 1
Differential Analysis
Differential analysis, sometimes called incremental analysis, analyzes differential revenues and costs to determine the differential impact on income of two alternative courses of action.
Differential analysis focuses on the effects of selecting alternative courses of action by examining only the relevant costs and revenues.

6. Differential Analysis
LO 1
Differential Analysis
Differential revenue is the amount of increase or decrease in revenue that is expected from a course of action as compared to an alternative.
Differential revenue is the increase or decrease in revenue that is expected from selecting one course of action over another.

7. Differential Analysis
LO 1
Differential Analysis
Differential cost is the amount of increase or decrease in cost that is expected from a course of action as compared to an alternative.
Differential cost is the increase or decrease in cost that is expected from selecting one course of action over another.

8. Differential Analysis
LO 1
Differential Analysis
Differential income (loss) is the difference between the differential revenue and the differential costs.
Differential income indicates that a particular decision is expected to be profitable, while a differential loss indicates that the decision is expected to decrease income.
Differential income or loss is the difference between the differential revenue and differential costs. Differential income indicates that a particular decision is expected to be profitable while a differential loss indicates the opposite.

9. Differential Analysis
LO 1
Differential Analysis
Choices are evaluated by considering only the net differential income or loss of the alternatives. The net differential income or loss is calculated by deducting differential costs from differential revenues. The net differential income or loss is the sum of the differences in revenues and costs between alternatives A and B.

10. Differential Analysis
LO 1
Differential Analysis
In this chapter, differential analysis is illustrated for the following common decisions:
Leasing or selling equipment
Discontinuing an unprofitable segment
Manufacturing or purchasing a needed part
Replacing fixed assets
Processing further or selling a product
Accepting additional business at a special price
Differential analysis is used to make decisions such as: leasing or selling equipment, discontinuing an unprofitable segment, manufacturing or purchasing a needed part, replacing usable fixed assets, processing further or selling an intermediate product, and accepting additional business at a special price.