Incremental earnings refer to the additional profits or revenues generated by a specific action, project, or investment, compared to the baseline or current earnings. This concept is especially relevant in business decision-making, as it helps evaluate the financial impact of new initiatives.
For instance, if a company decides to launch a new product, the incremental earnings would be the profits from the new product sales minus any associated costs, like production or marketing expenses. Simply put, it’s about understanding the extra financial gains attributed to a particular decision, helping businesses determine if an investment is worthwhile. Incremental earnings focus on the changes brought by specific decisions rather than looking at overall or average earnings, which can give a clearer perspective on profitability related to particular strategies.