Chapter 12 Differential Analysis and Decision Making

make or buy decision

A decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier, is called a make or buy decision.

differential revenue

A difference in revenue between any two alternatives is known as differential revenue.

avoidable cost

An avoidable cost is a cost that can be eliminated by choosing one alternative over another.

differential cost

Differential cost refers to the difference between the cost of two alternative decisions. The cost occurs when a business faces several options, and a choice must be made by picking one option and dropping the other.

Vertical Integration

When a company is involved in more than one activity in the entire value chain, it is vertically integrated.

split-off point

The split-off point is the point in the manufacturing process at which the joint products can be recognized as separate products.

differential analysis

differential analysis is a method that looks at how operating income would differ under each decision alternative. It leaves out irrelevant information.

Relevant Costs and Benefits

differential costs and differential revenues are the only inputs that are relevant to decision making, and are often referred to as relevant costs and benefits.