Question

Incremental Analysis

Explain incremental revenues and incremental costs. Provide a business example for each of these terms.

Answer 1

Incremental revenue is the revenue generated from the sale of additional units of goods. It can be for one unit as well as for an order of 1000 units.

In the same manner, the Incremental cost is the cost incurred for production such incremental units. Incremental costs strictly include only such costs which are incurred because of such incremental units. Therefore, fixed costs are included only if they are incremental. Sometimes, there might be some incremental benefits (reduction in costs) from such incremental production that also comes under incremental costs.

Example:

A manufacturing company has received an order of 2000 units of its product at a price of $25 per unit - Incremental Revenue.

To produce it will incur the variable costs for material and labor. - Incremental Costs

Also, there will be no advertisements costs - Incremental Benefits