In evaluating a special order, the difference between incremental revenue and incremental cost equals:

In evaluating a special order, the difference between incremental revenue and incremental cost equals:

• A. Incremental profit
• B. Net present value
• C. Total profit
• D. Accounting income

Answer: (A)

In incremental analysis for a special order, the key idea is to focus only on what changes if you take the order. The net result of those changes is the incremental profit. Specifically, when you subtract the incremental costs (the extra costs incurred to fulfill the order) from the incremental revenue (the extra revenue the order brings in), you get the incremental profit. This is the profit directly attributable to that decision, ignoring sunk costs and any costs that wouldn’t change with the order. That’s why the difference between incremental revenue and incremental cost is called incremental profit. The other concepts don’t capture the specific change caused by the decision: net present value looks at timing and discounting of cash flows, total profit is overall profitability not tied to a single decision, and accounting income includes non-cash items and allocated overheads that aren’t necessarily affected by the special order.

In incremental analysis for a special order, the key idea is to focus only on what changes if you take the order. The net result of those changes is the incremental profit. Specifically, when you subtract the incremental costs (the extra costs incurred to fulfill the order) from the incremental revenue (the extra revenue the order brings in), you get the incremental profit. This is the profit directly attributable to that decision, ignoring sunk costs and any costs that wouldn’t change with the order.

That’s why the difference between incremental revenue and incremental cost is called incremental profit. The other concepts don’t capture the specific change caused by the decision: net present value looks at timing and discounting of cash flows, total profit is overall profitability not tied to a single decision, and accounting income includes non-cash items and allocated overheads that aren’t necessarily affected by the special order.