Differential Analysis

The decision-making process known as differential analysis analyzes the net outcomes of two options after examining the costs and advantages of each. The alternative with the most advantageous (or least adverse) financial impact is the one that is chosen. Only those expenses are considered in the evaluation that will change if one alternative is chosen over another. The financial data that would be included in differential analysis also known as incremental analysis are avoidable costs, opportunity costs, sunk costs, direct fixed costs, allocated fixed costs (Gordon, 2022). When choosing between several action plans, it is always necessary to consider avoidable costs—costs that can be avoided by choosing a specific action plan. When doing a differential analysis, opportunity costs—the advantages lost when one alternative is chosen over another—must be considered. Since they will not differentiate between the two solutions, fixed costs or other costs that are constant for both are not included in the analysis. Fixed costs that are allocated rather than strongly connected with a product are not typically regarded differential costs (Libretexts, 2022). Direct fixed costs are differential costs and hence important when making decisions since they can be linked to a product line or client. Even though some direct fixed expenses can be attributed directly to a product line, we must nevertheless carefully analyze each of these costs on an individual basis. (Gordon, 2022 Costs incurred in the past are called sunk costs. These costs cannot be modified by actions made in the future—are not differential costs since they cannot be altered. Differential revenues and costs, also known as relevant revenues and costs or incremental revenues and costs, are the differences in revenues and costs between feasible options. I would consider opportunity cost in deciding, but I would not use sunk costs in deciding. Sunk costs have already occurred therefore are irrelevant. Whereas opportunity cost can help determine if the company will make a profit. I selected Coca-Cola as my manufacturer for unit 2. 200 product lines are available from The Coca-Cola Company (Brands & Products, n.d.). I do not have access to that data. I will make an educated guess about the unknown expenditures for the sake of the task and use the information that I do have. I will choose three product lines to make a differential analysis with, then complete one with removing a client. I decided to look at Peace Tea, and Coca Cola Bottling Corporation in the first analysis. Then look at removing Burger King as a customer. These numbers are in millions of dollars. Coca Cola revenue Keep Peace tea Remove Peace Tea, Unsweetened Category Differential Contribution Margin Ratio Net Operating Revenues Cost of goods sold Gross Profit 32.5% 30.2% Relevant (2.3%) 10,491 8,491 relevant (2000) 4091 3891 Relevant (1000) 6400, 9093 Relevant (1000) Operating Income Selling, general and administrative expenses Indirect Labor Administrative 3405 3200 Relevant (205) 4,091 4091 Irrelevant 0 1250 1148 Relevant (102) Equipment Value Equipment Disposal value Keep or Drop Net Operating Revenues Cost of goods sold Gross Profit Operating Income Selling, general and administrative expenses Indirect Labor Administrative Equipment Value Disposal value Profit (Loss) Contribution Margin Ratio Keep or Drop 22 22 Sunk 0 8000 Relevant 8000 Drop Peace Tea, Unsweetened Coca Cola Company Keep Burger king 10,491 Burger King Remove Burger King Category Differential 8,491 Relevant (2000) 4091 4891 Relevant (100) 6400, 3405 5400 1405 Relevant Relevant (1000) (205) 4,091 4091 Irrelevant 0 1250 1250 Irrelevant (102) 22 22 Sunk 0 0 0 (2000) 33.2% Irrelevant 8000 Relevant (2.3%) 32.5% Keep Burger King