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Continuing with the company selected in Unit 2, think about the types of financial data that would be included and excluded in the differential analysis. Propose which specific revenues and costs should be considered in an evaluation to drop or keep a:
In addition, explain sunk and opportunity costs as they relate
to your selected company. Should these costs be considered in
differential analysis? Why or why not?
The company is Caterpillar
Data form unit 2 :
Variable cost : $400,000,000
Fixed Cost : $25,000,000
Sales Cost : $1,000,000,000
Contribution Margin: $600,000,000
Contribution Margin Ratio: 60%
In every business decision that we are taking we need to consisdered the relevent and irrelevent cost.
The cost data which is relevent for decision making is consisdered.
Accordingly in the given case Variable cost of $400,000,000 is revelent for decision making.
Cost which remains common and constant are threated as irrelevent for decision making.
Hence we ignore the Fixed cost $25,000,000. for decsion making.
Sales volume is to be consisdered for evaluation.
Sunk cost or Historical cost which we already incured hence shold not be consisdered.
Oppournity cost is the cost of next best alternative which are relevent for differential analysis.
Some of the other non financial consisderations for analysis are as follows:
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