Question

Should we take into consideration/calculate lease costs in Incremental Analyses if the leased machinery is needed for the production?

Answer 1

Incremental analysis is basically a decision making tool which helps us to compare the costs & benefits of one choice compared to other alternatives. In this case, we have 2 alternatives:

1. Buy

2. Rent

Lets say that you want to use a machinery for the production of shirts in your company. Now, when you are doing incremental analysis, a lot depends upon the duration for which you intend to use the machinery. Lets take long term.

Suppose you incur leased cost of $100/month( assume). Now this will be your cost which you have to bear out of your company profits or your own pockets. Therefore, it makes sense to include leased cost in incremental analysis.

However, in the long term, it makes sense to buy out the machinery since you would be able to derive maximum utility out of that machine. In the short term, it makes more sense to leasing out to not bear the machine buy out costs.