Incremental analysis, also known as marginal analysis, is an examination of the additional benefits of an activity compared to the additional costs incurred by that same activity. In other words, it's a decision-making technique used in business to determine the true cost and benefit differences between alternatives.

Here are key aspects of incremental analysis:

• Focus on Relevant Costs and Revenues: Only costs and revenues that change as a result of a decision are relevant. Sunk costs (costs already incurred and cannot be recovered) and costs that remain the same regardless of the decision are ignored.
• Marginal Cost and Revenue: It compares the marginal cost (the additional cost of producing one more unit or taking one more action) with the marginal revenue (the additional revenue gained from that unit or action).
• Decision Rule: A decision is typically considered beneficial if the incremental revenue exceeds the incremental cost.
• Applications:
  • Pricing Decisions: Determining the optimal price point by considering the impact on sales volume and revenue.
  • Production Decisions: Deciding whether to increase or decrease production levels.
  • Make-or-Buy Decisions: Evaluating whether to manufacture a product internally or outsource it.
  • Accepting Special Orders: Assessing whether to accept a one-time order at a special price.

For example, imagine a company is considering accepting a special order for 1,000 units at a price lower than its usual selling price. Incremental analysis would involve comparing the additional revenue from the order with the additional costs of producing those 1,000 units (direct materials, direct labor, variable overhead). If the additional revenue exceeds the additional costs, accepting the order would increase profit, even though the price is lower than usual.

Investopedia provides a thorough explanation of incremental cost with examples: Incremental Cost Definition