Chapter 25, Problem 25QS

To determine

Concept Introduction:

Incremental Income or Differential income

At times, business faces choice like to keep the old machine or to replace the machine with a new machine. In such situations, incremental income, incremental revenue or incremental costs are calculated. On the basis of these factors, the decisions are taken.

Incremental income can be defined as the additional income that can be earned if one option is selected over the other.

For example, the revenue from product A is $ 10,000 and revenue from product B is $ 12,000, the incremental revenue

$\begin{array}{l}Incrementalrevenue=RevenuefromProductB-RevenuefromProductA\\ Incrementalrevenue=\text{ \$ 12,000 }-\text{ \$ 10,000}\\ Incrementalrevenue=\$2,000\end{array}$

This is how, incremental income or incremental revenue are calculated.

To determine:

Should the machine be replaced or not.