What does "incremental analysis" evaluate?

Incremental analysis evaluates the financial impact of different alternatives by focusing specifically on the changes in revenue and costs associated with those alternatives. This analysis is essential for decision-making, particularly in scenarios where a business must choose between different options, such as accepting a special order, discontinuing a product line, or making additional investments. By concentrating on the differences in costs and revenues that will change if one option is selected over another, incremental analysis helps managers understand what the true financial consequences of their decisions will be.

This approach allows decision-makers to ignore sunk costs and focus solely on the relevant costs that will be directly affected by the decision at hand. It is particularly useful for making short-term decisions, as it provides a clear view of how various choices will impact financial results, facilitating a more informed and strategic decision-making process.