We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is Incremental Analysis?

By James Corey
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Incremental analysis is a technique used to assist decision making by assessing the impact of small or marginal changes. Its origins are linked to the principles of marginal analysis derived by economists such as Alfred Marshall during the nineteenth century. Given this heritage, incremental analysis is also described as a procedure to assist decisions at the margin.

The most important principle of incremental analysis is that the only items relevant to a decision are those that will be different as a result of the decision. A second and related tenet is that if a past cost or negative is not recoverable or removable, it is irrelevant to a future decision. Those two principles have universal application. This style of analysis guides many decisions in nearly every discipline including engineering, architecture, management, epidemiology, medicine, demography, sociology, consumer behavior, and investment management.

Incremental analysis is applicable to both short- and long-run issues, but is particularly suited to short-run decisions. In the short run, production capacity remains unchanged so, by definition, fixed costs do not vary due to capacity shifts. In the long run, production capacity is changeable; more elements will thus generally be required to be incorporated into an incremental analysis.

A simple situation in everyday life provides an example of incremental analysis. Consider a worker leaving work to travel home. Groceries are required and can be purchased at slightly higher prices at a store on the way from the work place to the home, or at lower prices by driving to a store 3 miles (4.82 km) from home. The worker decides to purchase the groceries on the way home since no incremental travel costs are involved, and the incremental difference in grocery prices will be less than the value the worker places on the time and other costs required to drive to the more distant store.

In business, firms routinely use incremental analysis to assist a large range of decisions, including leasing versus purchasing of new assets, acquisitions and divestments, capacity expansions and additional raw material processing decisions. A key issue usually is determining the incremental impact on capital outlays, costs, and revenues. This is not always clear cut before the event and judgments are often required.

For example, a manufacturing firm deciding whether or not to accept new revenue in the form of a small order typically needs to identify which costs will change if the order is accepted. A large number of costs will remain fixed including lease payments, insurances, local government rates, cleaning costs, and telecommunication rental costs. Raw material costs will increase. The impact on factory labor costs, however, is not clear. They may remain the same if there is sufficient slack in the system; if not, new hires may need to be factored-in to the analysis.

Incremental analysis is sometimes referred to as incremental cost analysis, relevant cost analysis, or differential cost analysis. These terms may be confusing, since they suggest the technique is focused exclusively on costs, but this is incorrect.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.