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And finance Allah shmoop What is differential analysis All right

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people Well it's a cost accounting term that asks How

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could we do our business differently and better Different version

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of you know doing our bidness Okay so you work

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in the accounting department of Whisper Whisker the leading provider

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of beard hair implants for chin bald millennial men Your

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boss comes to you with a project Currently you use

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one bad hormone therapy for one of your more popular

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procedures because as whisper whiskers states in its brochures the

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wombats lustrous hair gives your new beard the inviting pen

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ability Your special someone will love However one bats are

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on the endangered species list minor detail and lately whisper

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whisker has been getting a lot of bad PR from

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the pro wombat lobby So your boss wants to make

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us switch well there are two options On one hand

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you're a boss says that the purchasing department can get

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a deal on Angora rabbit glands But on the other

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hand the RND department says musk ox glands worked much

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better for the hormone therapy you provide He wants to

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let you figure out which option costs less on a

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per procedure basis Assuming everything else is equal well to

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figure it out you're going to use differential analysis Basically

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you look at the various potential solutions and see which

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one makes the most sense You run the numbers A

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musk ox Eagle Land provides enough hormone for seventeen therapy

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sessions However they're hard to farm in The special humane

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extraction technique is expensive Each gland cost you a grand

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for angora as well It's much cheaper They're smaller and

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easier to handle Therefore each rabbit gland only cost two

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hundred fifty dollars However you get less hormone from each

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gland in the hormone is less potent so each angora

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gland is only good enough for four therapy sessions So

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you're spending two hundred fifty bucks for for therapy sessions

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with the Angora and you're spending a grand for seventeen

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sessions for the musk ox Well it's Keone differential analysis

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to get rid of as much noise as possible so

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you reduce the calculations here too The one unit scenario

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like compare apples to apples in this guy Jason glands

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to glance for this analysis well you're keeping all cost

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the same it once the hormone is acquired The procedure

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is the same whether musk ox or in glands or

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you for the rabbit gland The hormone cost for the

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procedure will run sixty to fifty each time There's the

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math for musk ox while the cost is about fifty

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eight eighty to everything else remaining equal Well you'll be

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better off better profit margins that is going with the

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musk ox because it's chief for well the price for

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the animal glands is called the differential cost It's the

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cost that will change as part of the change that's

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being made right It's differentiating the analysis here Meanwhile large

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number of other cost stay the same The doctor to

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perform the hormone insertion the facility where the therapy takes

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place the insurance the advertising and so on None of

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these costs get impacted by the switch in the source

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of the hormone So you let your boss know and

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he gets the wheels in motion It's set up the

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musk ox farms at least until the musk ox lobby

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gets wind of it Oh those musk ox people are

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such a pain differential analysis will also let you know

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when something doesn't matter like you use a special dye

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in some of your premium procedures It makes the beards

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whatever color a person wants They can match their you

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know natural hair color or go wild Rainbow Wild is

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popular feature these days Fire orange however is the most

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popular color You also offer a tight teal that's well

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not so popular We'll fire orange outsells type deal by

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a three to one ratio The problem Fire orange is

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significantly more expensive like five times more Should you discontinue

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fire orange and have sales people pushed the cheaper tight

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Teel Well probably no not really The customer wants With

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customer wants right a therapy session is worth five hundred

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dollars in revenue The tight he'll die needed for a

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session costs a dollar fire Orange costs five dollars Yes

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it's five times more but it's nearly negligible on a

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relative basis like as a total of the five hundred

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dollars in revenue you get It's almost a rounding error

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if discontinuing fire orange drop sales even a percent while

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the move will end up hurting profit in the long

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run The gland switch situation was a pretty simple example

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but differential analysis It can get complicated quickly Take this

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seemingly straightforward scenario You make a line of branded beard

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maintenance products combs and decorative ties You make them in

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America with union labor The cost to whisper whiskers all

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in is about thirty seven dollars an hour for the

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union labor you face competition from China Their products are

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about ninety percent as good as yours but they're half

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the price Is there a way to be able to

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make your product such that you could drop prices by

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a third even and still be competitive Alright while the

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differential analysis here can you train a foreign labor force

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to do about same job is your union workers do

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in Chicago and get them to do it for five

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bucks an hour And will there be tariffs or import

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duties and other frictions like shipping costs and shipping risk

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If you do go ahead and make the switch and

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you know make him in Mexico or China or the

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Philippines or somewhere and oh what about the fine print

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in those union contracts How long are you obligated to

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keep your expensive union US force Like maybe you have

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two years of payroll that you have to get through

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so maybe it's not worth is too expensive to switch

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Differential analysis divides itself naturally into short term and long

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term decisions as well Kind of like a balance sheet

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like a short term analysis might revolve around discounting last

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year's model of beard ty to clear them off the

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shelves and make room for this year's models which now

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boast a delicious cappuccino sent will long term Well what

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if we used robots to make the combs and beard

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ties instead of bothering with a human workforce at all

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No robot union right The cap ax to build those

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robots is a long term decision like you don't just

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make him configure him And in four months get your

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money back Well same deal with big distribution decisions like

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partnering with Walmart or trying to enter the lucrative Russian

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millennial market or China or Somalia while getting into Somalia

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Isn't that hard It's you know getting out that compose

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it challenge there What

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