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Incremental Principle

The incremental principle is used to measure the profit potential of a project. According to this theory, a project is sound if it increases total profit more than total cost.
To have a proper estimation of profit potential by application of the incremental principle, several guidelines should be maintained:

Incidental Effects:
Any kind of project taken by a company remains related to the other activities of the firm. Because of this, the particular project influences all the other activities carried out, either negatively or positively. It can increase the profits for the firm or it may cause losses. These incidental effects must be considered.

Sunk Costs:
These costs should not be considered. Sunk costs represent an expenditure done by the firm in the past. These expenditures are not related with any particular project. These costs denote all those expenditures that are done for the preliminary work related to the project, unrecoverable in any case.
Overhead Cost:
All the costs that are not related directly with a service but have indirect influences are considered as overhead charges. There are the legal and administrative expenses, rentals and many more. Whenever a company takes a new project, these costs are assigned.

Working Capital: Proper estimation is essential and should be considered at the time when the budget for the project's profit potential is prepared.



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Last Updated on : 27th June 2013

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