Boswell Plumbing Products

In: Business and Management

Submitted By ShastanCody
Words 452
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Boswell Plumbing Products produces a variety of valves, connectors, and fixtures used in commercial and residential plumbing applications. Recently a senior manager walked into the cost accounting department and asked Nick Somner to tell her the cost of the D45 valve. Nick quickly replied, “why do you want to know?” Noticing that the manager appeared somewhat startled by this question, he explained, “The cost information you need depends on the decision you’re going to make. You might be thinking of increasing a scheduled production run of 3000 D45s by 100 units or scheduling an additional production run, or you might even be thinking of dropping the product. For each of these decisions, the cost information that you need is different.”
Required
Using the concept of incremental analysis, expand on Nick’s response of “Why do you want to know?” What cost information would be relevant to a decision to drop the product that would not be relevant to a decision to increase a production run by 100 units?

According to the text, incremental analysis is the appropriate way to approach the solution to all business problems. It involves the calculation of the difference in revenue and the difference in cost between decision alternatives. The difference in revenue is the incremental revenue of one alternative over another, whereas the difference in cost is the incremental cost of one alternative over another. If an alternative yields an incremental profit (the difference between incremental revenue and incremental cost), it is the preferred alternative. Jiambalvo pg 11. Therefore, based on incremental analysis, if you have the cost of the valve, you can figure out the revenue, cost and profit of increasing production, scheduling an additional run or dropping the product. This analysis will allow you to measure the benefit or disadvantages of future actions with…...

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