What managerial decisions are influenced by differential ana

What managerial decisions are influenced by differential analysis reports? How do these reports help in decision making?

Solution

Differential analysis refers to the comparative (differential) analysis of revenues and costs attached to the alternative options available for a problem.

Differential costs or revenues are future costs or revenues that differ between the alternative options available for a problem. For such situations, future costs that do not change between alternatives are ignored and past costs (sunk costs) are not considered.

After analysing differential costs and revenues, the alternative with the greatest positive net revenue should be selected. If only revenues are to be considered, costs being the same, the alternative with the highest revenue should be selected and if only costs are to be considered, revenues being the same, the alternative with the least total cost should be selected.

Where only two options are analysed at a time, the differential costs and revenues are calculated and an option is selected if it produces positive differential income. Where only revenues are compared the option which gives positive differential revenue when compared with the alternative is selected, and for cost based analysis, there should be savings in costs.

Some of the situations in which differential analysis can be used are:

Differential analysis reports highlight only the relevant revenues and costs (future revenues and costs that change between alternatives) and do not cloud the analysis and discussion with irrelevant data. Thus, it is very objective and helps in correct decision making.