Describe incremental analysis and how it informs make-or-buy or special-order decisions.

• A. Compare relevant costs and benefits of options; ignore sunk costs; include opportunity costs and qualitative factors; compute net incremental advantage.
• B. Consider sunk costs only.
• C. Base decisions on intuition without cost considerations.
• D. Always choose the cheaper option without evaluating benefits.

Answer: (A)

Incremental analysis looks at the costs and benefits that change when you choose one option over another, exactly what you need for make-or-buy and special-order decisions. The key is to focus on relevant items: ignore sunk costs—those past expenditures you can’t recover—because they don’t change with the decision. Include opportunity costs, such as the value of the best alternative use of scarce capacity or resources, and consider qualitative factors like quality, delivery reliability, and supplier relationships that can affect long-term value. Then compute the net incremental advantage, which is the incremental revenues or savings minus the incremental costs and any foregone opportunities. If the net is positive, that option is favored.

In a make-versus-buy choice, you compare the costs that actually differ between making in-house and buying, including variable costs and any incremental fixed costs tied to the decision, along with opportunity costs of using capacity for one option over the other. In a special-order scenario, you weigh the additional revenue from the order against the incremental costs to fulfill it (such as setup, overtime, or special processing) and any impact on regular business, including capacity constraints and potential effects on price or quality for other customers.

Other approaches that ignore these distinctions—relying only on sunk costs, basing decisions on intuition without cost data, or always picking the cheaper option without evaluating benefits—can lead to suboptimal choices.