Incremental Analysis


DEFINITION of 'Incremental Analysis'

A decision-making technique used in business to determine the true cost difference between alternatives. Incremental analysis ignores sunk costs and costs that are the same between the two alternatives to look only at the remaining costs. For this reason, it is also called the "relevant cost approach," "marginal analysis" or "differential analysis."

BREAKING DOWN 'Incremental Analysis'

If a company is considering replacing its old copy machine, using incremental analysis, the company would not look at the cost of the existing copy machine because it is a sunk cost (the cost of buying it cannot be reversed). They would look at things like the cost of toner cartridges for each machine, the cost of the electricity run each machine, and most importantly, the time saved by having employees use a more efficient model and perhaps the cost savings of being able to prepare documents in-house instead of outsourcing them.

  1. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
  2. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. ...
  3. Irrelevant Cost

    A managerial accounting term that represents a cost, either positive ...
  4. Valuation Analysis

    A form of fundamental analysis that looks to compare the valuation ...
  5. Relevant Cost

    A managerial accounting term that is used to describe costs that ...
  6. Depreciated Cost

    1. The value of an asset net of all accumulated depreciation ...
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