Incremental __ is incremental revenues minus incremental costs.
The Correct Answer and Explanation is:
profit
Explanation:
The correct term to complete the sentence is profit. Incremental profit is the additional profit a company earns from a specific business decision, such as producing and selling one more unit of a product or accepting a special order. It is calculated by subtracting the additional costs incurred from the additional revenues generated by that decision.
This concept is a cornerstone of incremental analysis, a decision making tool that helps businesses evaluate the financial consequences of a choice. The formula is straightforward: Incremental Profit = Incremental Revenues – Incremental Costs.
Let’s break down the components. Incremental revenue is the change in total revenue that results directly from the decision. For example, if a company decides to sell one more item for $50, the incremental revenue is $50.
Incremental cost, also known as marginal cost, is the change in total cost resulting from that same decision. This typically includes variable costs like raw materials and direct labor needed for the extra production. Fixed costs, such as rent or administrative salaries, are generally not included because they do not change with the decision to produce one more unit. If the materials and labor for that extra item cost $20, then the incremental cost is $20.
By calculating the incremental profit, which would be
30inthisexample(30inthisexample(50 – $20), a company can determine if a particular action is financially beneficial. If the incremental profit is positive, the decision will add to the company’s overall profitability. This analysis is crucial for making informed choices about pricing, production levels, and special projects.
