Close this search box.

Table of Contents

Incremental Analysis


Incremental analysis, also known as marginal analysis, is a financial decision-making technique used to assess the additional costs and benefits of two or more potential actions. By comparing the differences in revenue and expenses, it helps organizations to make choices that will maximize their profits. This method focuses on the short-term consequences, ensuring managers to take the most economically advantageous path among the available options.


The phonetics of the keyword “Incremental Analysis” are:/ˌɪnkrəˈmɛntəl əˈnælɪsɪs/Here’s a breakdown:Incremental – /ˌɪnkrəˈmɛntəl/Analysis – /əˈnælɪsɪs/

Key Takeaways

  1. Incremental Analysis refers to a decision-making process that involves examining the additional costs and benefits of various alternatives, helping in making informed choices by considering only the relevant factors.
  2. It is highly useful in making short-term decisions like pricing, make-or-buy, or resource allocation, as it simplifies complex problems and reduces the time and effort spent on analyzing the entire set of data.
  3. Incremental Analysis also has its limitations, including the potential to overlook fixed costs, an inherent dependency on accurate data, and the short-term nature of its scope, which may not always provide a comprehensive view of the long-term impact of a decision.


Incremental analysis is important in the realm of business and finance as it allows decision-makers to assess the impact of potential changes and make informed choices based on the variations between different alternatives. By focusing on the differences in costs and revenues between various options, incremental analysis provides insight into the additional benefits and expenses tied to each decision. This analytical tool aids in evaluating short-term decisions, such as pricing, sales promotions, production volume, and outsourcing, promoting efficient resource allocation and maximizing profitability. Ultimately, incremental analysis serves as a vital decision-making technique that helps businesses achieve their strategic and financial goals.


Incremental analysis serves as a valuable tool for informed decision-making in both finance and business operations. The primary purpose of this analytical process is to evaluate the impact and profitability of alternative courses of action, by examining the differences in costs and revenues that stem from those decisions. By isolating these incremental costs and benefits, incremental analysis allows managers and decision-makers to understand how potential changes may affect the overall performance of their organizations. Incremental analysis is commonly used in various decision-making scenarios, including whether to accept or reject a special order, make or buy crucial business components, eliminate or continue a product line, optimize resource allocation, and select financing alternatives. By focusing on the incremental differences rather than the entire cost structure, organizations can better identify the most feasible and profitable options. Therefore, incremental analysis plays a critical role in strategizing and prioritizing business decisions, helping organizations achieve optimal growth and financial performance.


1. Make or Buy Decision: A manufacturing company currently produces a critical component in-house, and the production cost per unit is $50, including labor and materials. The company is considering switching to a third-party supplier who can offer the same component at a price of $40 per unit. In this situation, the incremental analysis would evaluate the cost savings ($10 per unit) against the potential loss of control over quality or supply chain and other factors, such as potential job losses or increased lead time. The company would make their final decision based on this incremental analysis. 2. Expansion of Production Capacity: A bakery is operating at full capacity and must decide whether to invest in additional equipment to increase production. Incremental analysis would involve comparing the additional cost of the new equipment, such as purchase price, installation, and maintenance costs, with the expected incremental revenue generated from the increased production capacity. This comparison may also take into account the opportunity cost of not expanding and the potential impact on market share if customer demand cannot be met. 3. Launching a New Product Line: A fashion retailer is considering adding a new product line to their existing offerings to capitalize on a new market trend. Before making a decision, they would use incremental analysis to compare the potential revenue generated by the new product line with the costs associated with producing, distributing, and marketing the new line. Factors that might be considered in the analysis include market research, potential sales, production costs, required inventory investment, marketing expenses, and any additional resources needed, such as staff or equipment. The retailer would use this information to assess whether the potential profit from the new product line justifies the required investment.

Frequently Asked Questions(FAQ)

What is Incremental Analysis?
Incremental Analysis is a decision-making technique used in finance and business to determine the true cost difference between different alternatives by considering the relevant costs and revenues associated with each choice. It aims to identify the net benefit or expense of each option, thereby helping businesses make the most financially beneficial decisions.
When is Incremental Analysis applied in a business context?
Incremental Analysis is useful in various business scenarios, including pricing decisions, make or buy decisions, additional product line considerations, and special orders, among others. It is often applied when decision-makers need to choose between different alternatives that impact costs, revenues, or both.
What are the key components of Incremental Analysis?
The primary elements of Incremental Analysis include relevant costs, revenues, and decision criteria. Relevant costs represent costs that differ between the alternatives, whereas irrelevant costs or sunk costs do not impact the decision. Incremental revenues represent the change in revenues or benefits between the alternatives. Finally, decision criteria are the predefined goals or objectives the business is striving to achieve.
Is Incremental Analysis the same as Cost-Benefit Analysis?
Although Incremental Analysis and Cost-Benefit Analysis share similarities, they are not the same concept. Incremental Analysis focuses on the specific differences in costs and revenues between alternatives, whereas Cost-Benefit Analysis evaluates the total costs and benefits of a particular project or decision to determine its overall value.
What are the benefits of Incremental Analysis in financial decision-making?
Incremental Analysis offers several advantages in financial decision-making processes, including:1. Improved decision-making: By focusing on relevant costs and revenues, Incremental Analysis helps businesses make more informed choices based on the actual differences between alternatives.2. Simplification: By removing irrelevant costs and revenues from the decision-making process, Incremental Analysis simplifies complex scenarios and eliminates the confusion caused by extraneous information.3. Enhances objectivity: Incremental analysis facilitates a structured and objective approach to financial decision-making, reducing the influence of personal biases or preconceived notions.
What are the limitations of Incremental Analysis?
Like any decision-making tool, Incremental Analysis has its limitations:1. Incomplete information: Incremental Analysis is dependent on the accuracy of the available data. If certain critical information is missing or inaccurate, the analysis might lead to poor decision-making.2. Subjectivity: Determining relevance can sometimes be subjective, as decision-makers may have differing opinions on which costs and revenues are relevant.3. Assumes rational decision-making: Incremental Analysis assumes that decision-makers act rationally and are solely focused on optimizing financial outcomes, which may not be true in all situations, as other factors may influence the decision-making process.

Related Finance Terms

Sources for More Information

About Our Editorial Process

At Due, we are dedicated to providing simple money and retirement advice that can make a big impact in your life. Our team closely follows market shifts and deeply understands how to build REAL wealth. All of our articles undergo thorough editing and review by financial experts, ensuring you get reliable and credible money advice.

We partner with leading publications, such as Nasdaq, The Globe and Mail, Entrepreneur, and more, to provide insights on retirement, current markets, and more.

We also host a financial glossary of over 7000 money/investing terms to help you learn more about how to take control of your finances.

View our editorial process

About Our Journalists

Our journalists are not just trusted, certified financial advisers. They are experienced and leading influencers in the financial realm, trusted by millions to provide advice about money. We handpick the best of the best, so you get advice from real experts. Our goal is to educate and inform, NOT to be a ‘stock-picker’ or ‘market-caller.’ 

Why listen to what we have to say?

While Due does not know how to predict the market in the short-term, our team of experts DOES know how you can make smart financial decisions to plan for retirement in the long-term.

View our expert review board

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More