Discussion Forum Unit Four – Differential Analysis
Differential analysis entails the evaluation of different costs and benefits that would ensue from alternative solutions to a specific problem in an organization. Pertinent revenues or costs in a specific situation are future revenues or costs that vary depending on the substitute course of action opted. Overall, differential revenue is the change in revenues between two alternatives (Heisinger & Hoyle, 2012). On the other hand, differential cost or expense is the variance that exists between amounts of significant expenses for two alternatives.
Boeing, which is commonly referred to as the 800-pound gorilla of US aerospace is the world’s largest aerospace corporation. The corporation’s net income for the quarter ending March 31, 2020, was $-0.628B (Macrotrends, 2020). Basing on the corporation’s net income figures, one can conclude theta the firm’s financial position is stable. Boeing’s different categories of financial data would be included and excluded in the differential analysis. The corporation’s data to be included in the differential analysis include future differential revenues and future differential costs. On the other hand, data that shall be excluded in the differential analysis include sunk costs such as historical expenses, the future common cost that does not vary between available alternatives and non-fictional aspects, for instance, depreciation.
The corporation’s specific revenues and costs would be considered in an evaluation to drop or keep the customer or product line. The decision-making procedure whether to keep or drop a customer entails tracing data that is directly linked with the target client (s). The process entails a differential analysis of incremental sales revenue, incremental variable costs, and incremental fixed costs, which are recognizable directly to the target client. Through this assessment, the option that enhances the overall profitability of the corporation is regarded as positive for the organization.
Boeing decision-making process, whether to keep or drop a product line involves trailing of information regarding the target product line. The approach entails a differential analysis that is grounded on sales revenue, variable costs, direct fixed costs and opportunity costs (Walther & Skousen, 2009). A product line is perceived to be better off keeping the product line when the differential analysis is profitable; else, the product line should be dropped. In our case, apportioning fixed costs would be inappropriate since they will incur as usual irrespective of the product line.
Sunk costs are not reflected in the differential analysis since these outlays have incurred already and cannot be altered, for instance, depreciation, cost of machinery and other equipment. Contrariwise, opportunity costs, which is the benefit foregone can be a part of the differential analysis as these costs have not been sustained yet and may impact on future decisions.