Management uses differential analysis to decide between two viable options. Proper use of differential analysis requires the ability to differentiate between relevant and irrelevant costs; that is - costs that are important to the decision and costs that have no weight on which choice is made. In this assignment you will practice your ability to recognize relevant and irrelevant costs.
At Global Airways, Penny Piper, Manager of Flight Scheduling, needs to make a decision about flight scheduling. Presently Global Airways flies from Chicago to Honolulu nonstop, but she is considering making a stop in Phoenix. The route would attract some additional passengers, but would also incur additional costs.
Penny has prepared the following data to help her in making this decision.
| $200,000 |
$225,000 |
$25,000 |
| 50,000 |
50,000 |
0 |
| 0 |
5,000 |
(5,000) |
| 0 |
3,000 |
(3,000) |
| 2,000 |
2,500 |
(500) |
| 25,000 |
30,000 |
(5,000) |
| 4,000 |
5,000 |
(1,000) |
| 1,000 |
1,000 |
0 |
| 218,000 |
228,500 |
(10,500) |
Instructions
Do the following for this assignment:
- Identify each cost as relevant or irrelevant.
- Then analyze your results to determine whether Global Airways should make the stop in Phoenix or continue with the non-stop flight. State the action Global Airways should take.