 Companies are phased with many short-term business decisions. The decisions often require choosing between alternatives. We will learn how to choose between alternatives using the incremental analysis method, which focuses only on the items that differ among alternatives. Here is a very simple example. In this case, we have two alternatives, A and B. We have both revenues and expenses. We need to decide which to choose. Let's do that by using incremental analysis, which again focuses on the differences. Alternative A increases revenue 25,000 over alternative B. Alternative B has 15,000 less expense than alternative A. Therefore, alternative A provides $10,000 more of income. This example was so simple, you didn't really need to use incremental analysis to do it. But we want to follow the steps so that we know how to do it when the alternatives become more complicated. In doing incremental analysis, we need to understand some key terms. Relevant costs, opportunity costs, and sunk costs. Relevant costs are expected future data that differ among alternatives. They can be both quantitative and qualitative. Opportunity cost is the cost of the next best alternative not chosen. For example, if we choose alternative A, we do so at the expense of choosing alternative B. Sunk costs are costs that have occurred in the past and cannot be changed. Therefore, they should not influence our future decisions. The amount you paid for your old car is a sunk cost and not relevant in your decision to buy a new car. So sunk costs fall into the category known as irrelevant costs. These are items which either don't impact future decisions or don't differ between alternatives. If you are deciding between two cars that have the same warranty, then the warranty costs are irrelevant in your decision since they don't vary depending on your choice. Finally, let's talk about the relevant non-financial factors or qualitative factors. Some of the decision managers make are not just financial in nature. Laying off employees to cut costs has a human cost. Outsourcing manufacturing might cause less control over quality and delivery any times. Discounting prices to select customers could cause relationship problems with other customers. Managers need to pay attention to these factors as well as the financial impact of decision making. So incremental analysis is often used to make six common short-term business decisions shown on this slide here. I encourage you to watch the videos on each of these topics.