1. Explain the meaning of (a) differential revenue, (b) differential cost, and (c) differential income.
Differential revenue is the amount of increase or decrease in revenue that is expected from a course of action compared to an alternative.
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 income is the difference between the differential revenue and differential costs.
2. A chemical company has a commodity-grade and premium-grade product. Why might the company elect to process the commodity-grade product further to the premium-grade product?
use differential analysis to decide whether to sell a product at an intermediate stage or to process it further.The differential revenues and costs from further processing are compared. The costs of producing the intermediate product do not change, regardless of whether the intermediate product is sold or processed further.
3. A company accepts incremental business at a special price that exceeds the variable cost. What other issues must the company consider in deciding whether to accept the business?
proposals to sell products at special prices often require additional considerations. for example, special prices in one geographic area may result in price reductions in other areas with the result that total company sales revenues decrease. manufacturers mush also conform to the Robinson-Patman Act, which prohibits price discrimination within the united states unless price differences be justified by different costs.
4. A company fabricates a component at a cost of $6.00. A supplier offers to supply the same component for $5.50. Under what circumstances is it reasonable to purchase from the supplier?
Differential analysis can be used to decide whether to make or buy a component. the analysis is similar whether management is considering making a part that is currently being purchased or purchasing...