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CA Foundation · Business Economics · Nature and Scope of Business Economics

Which of the following is an example of the incremental principle applied by a business manager?

Accepting a special order only when the extra revenue exceeds the extra cost it causes is the incremental principle. It judges a decision by the changes it brings about, ignoring sunk and unchanged costs, so the firm gains if incremental revenue is higher.

  1. AAccepting a special export order only if the additional revenue exceeds the additional cost it causesCorrect
  2. BRejecting every order priced below the average total cost
  3. CIgnoring the cost of capital while evaluating projects
  4. DFixing price solely on the basis of past sunk expenditure

Explanation

The incremental principle compares the change in revenue with the change in cost caused by a decision. A decision is worthwhile if incremental revenue exceeds incremental cost. Option B uses average total cost, which includes fixed costs that may not change, and Option D relies on sunk costs, which are irrelevant.

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