The Importance Of Differential Analysis In Business

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In business, decisions are made based on the analysis of the different factors that affect the business elements due to the nature of the business. The availability of data is the key case for providing accurate analysis on which decisions will be based. On the light of the above mentioned, this paper will provide a description for the differential analysis in dropping /keeping customers, product line offerings, and making or buying decisions. Also, discussion in this paper is going to involve the role qualitative information may have on differential analysis as well as sunk and the opportunity cost and explaining why managers must consider those issues. In the first stage I will focus the light on what the differential analysis means.…show more content…
That is also called (outsourcing). These two factors are the cornerstones that must be considered quantitative and qualitative analysis. Companies go for taking such decisions in case of reducing the capacity, having problems or difficulties with suppliers (Martin, (January 25, 2015)). Also, lack of expertise, small quantity requirement, the company's strategy of having multiple sources, lack of developed technology and so many other reasons could be behind Make-or-Buy decisions. When the company goes for in-house producing, the products must incur all the costs and expenses that are related to the products. On the other hand, if the company decided to go for the outsourcing the purchased product must include all the expenses up till the purchased products are received and stored. Multiple opinions are needed to compare either the qualitative analysis, but the quantities aspect is…show more content…
So, the sunk costs have to deal with historical cost data; and it is not useful to use them for taking future decisions also, there is no need to reflect sunk costs in the incremental cash flows for assessing the net present value and the internal rate of return ("Sunk Costs vs Opportunity Costs", (n.d.)). For example, if the company decided to buy 4 disks each one costs $2,000 so, the company invested $8,000 by making that payment and to get the money back that requires the company to liquidate the purchased items. opportunity cost is that kind of costs that needs no payment of cash or cash equivalent because it reflects the given up income because of choosing an alternative. It is the different between the given up and the selected alternative. For example, if my company decided to buy 100 shares and has two alternatives, companies A and B offering shares for sale in cost of $1,000 for a share. Later on, the share price of company A rose to $1,200, whereas the share price of company B rose to $1,500. The difference in the net profit of the two companies $500,000- $200,000= $300,000 is the opportunity cost if my company has chosen the company A to buy
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