Boswell Plumbing Products produces a variety of valves, connectors, and fixtures

Question

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 3,000 D45s by 100 units or sheduling 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."
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?

Explanation / Answer

This is a really interesting question! However, I should warn you that I don't have much business expertise. However, there IS a business section of Cramster where you can post questions that have something to do with business (i.e. accounting, for this question). The resources I could find for incremental analysis basically tell me that incremental analysis is used to identify the relevant revenues and/or costs associated with different alternatives and the expected impact of the alternative on future income. Relevant costs are the ones that differ among alternatives - ones that stay the same are ignored, as are sunk costs (i.e. costs that have already been incurred and therefore do not impact future alternatives). Additionally, opportunity costs that are lost when one alternative is pursued over another have to be considered in incremental analysis. So, with this question, ask yourself what would be the costs of producing 3,000 units versus dropping the product, for example. What revenues might be gained or lost? What cost savings could be achieved? What about the cost of materials? Make sure to not include the cost of rent, for example, but do include any additional costs in running the production machinery if production is increased. Basically, since this question is so open-ended, you imagination is the limit! Good luck!

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