Relevant Revenues

Definition

Relevant revenues are the revenues that are expected to differ between alternative courses of action. They are the revenues that are directly impacted by a decision and are crucial in evaluating the financial implications of that decision. Relevant revenues are a key consideration in making managerial decisions, such as whether to accept or reject a special order or whether to keep or discontinue a segment or product.

5 Must Know Facts For Your Next Test

1. Relevant revenues are the key consideration in evaluating whether to accept or reject a special order, as they represent the additional revenues that would be generated by accepting the order.
2. When evaluating whether to keep or discontinue a segment or product, relevant revenues are the revenues that would be lost if the segment or product is discontinued.
3. Relevant revenues should be considered in conjunction with relevant costs to determine the overall financial impact of a decision.
4. Relevant revenues may include the selling price, volume, and mix of products or services affected by the decision.
5. Identifying and quantifying relevant revenues is crucial in making informed managerial decisions that maximize the organization's profitability.

Review Questions

• Explain how relevant revenues are used in the decision to accept or reject a special order.
  • When evaluating whether to accept or reject a special order, the key consideration is the relevant revenues that would be generated by accepting the order. Relevant revenues represent the additional revenues that would be earned, which should be compared to the relevant costs to determine the overall financial impact. By focusing on the relevant revenues, managers can make an informed decision that maximizes the organization's profitability, as the special order may contribute to covering fixed costs and contributing to profits, even if the selling price is lower than the normal price.
• Describe how relevant revenues are used in the decision to keep or discontinue a segment or product.
  • When deciding whether to keep or discontinue a segment or product, the relevant revenues are the revenues that would be lost if the segment or product is discontinued. These relevant revenues represent the contribution the segment or product makes to covering fixed costs and contributing to overall profits. By identifying and quantifying the relevant revenues, managers can evaluate the financial impact of discontinuing the segment or product and make an informed decision that aligns with the organization's strategic goals and profitability objectives.
• Analyze the role of relevant revenues in the broader context of differential analysis for managerial decision-making.
  • Relevant revenues are a key component of differential analysis, which is the process of identifying and comparing the relevant revenues, relevant costs, and relevant incomes between alternative courses of action to determine the most favorable decision. By focusing on the relevant revenues, managers can assess the financial implications of a decision and make informed choices that maximize the organization's profitability. Relevant revenues, in conjunction with relevant costs, provide the necessary information to evaluate the differential impact of a decision, allowing managers to select the alternative that best aligns with the organization's strategic objectives and financial goals.

Related terms

Relevant Costs: Relevant costs are the costs that are expected to differ between alternative courses of action. They are the costs that are directly impacted by a decision and are crucial in evaluating the financial implications of that decision.

Contribution Margin: Contribution margin is the difference between the selling price and the variable costs of a product or service. It represents the amount of revenue available to cover fixed costs and contribute to profits.

Differential Analysis: Differential analysis is the process of identifying and comparing the relevant revenues, relevant costs, and relevant incomes between alternative courses of action to determine the most favorable decision.