Many times both future costs and revenues differ between alternatives. In these situations, the management should select the alternative that results in the greatest positive difference between future revenues and expenses (costs). The incremental revenue of Rs. 10,000 is much more than the differential cost of Rs. 3,000, it will increase the profit by Rs. 7,000. what is framework are the increase or decrease in total costs that result from producing additional or fewer units or from the adoption of an alternative course of action. In make-or-buy decisions, management also should consider the opportunity cost of not utilizing the space for some other purpose. Overhead Variance: What is a Variable Overhead Variance vs a Fixed Overhead Variance? This can help them hear suggestions on improving their services and products. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. Sometimes the cost to manufacture may be only slightly less than the cost of purchasing the part or material. For example, if a product line is eliminated, these costs are simply allocated to the remaining product lines. Incremental costs are the extra expenses spent […]