Incremental cost-volume-profit analysis

The discussion of sensitivity analysis for cost-volume-profit model is limited in most cost accounting textbooks. In this article, incremental analysis, a methodology that involves a model of relative incremental changes, is introduced as a framework for conducting sensitivity analysis. With the use of a case example and graphs, it is demonstrated that the relationship among the key variables in the system becomes more visible and the analysis more transparent when incremental cost-volume-profit analysis is employed. Also, the incremental cost-volume-profit model can be used in determining the optimal course of action (such as the optimal price increase) for profit maximization.