Final answer:
Fixed costs are sunk and should not affect future production decisions, while variable costs are essential for incremental analysis as they can change and directly impact cost management strategies and production volume decisions.
Step-by-step explanation:
Sydney Greene is contemplating the importance of variable costs and fixed costs in the context of incremental analysis in a business setting. To understand profitability, one needs to assess whether total revenue exceeds total costs. Fixed costs are considered sunk costs; they are irreversible and have already been incurred—thus, they should not influence future economic decisions. On the other hand, variable costs are directly associated with production and can be modified. These costs provide crucial data for a business to strategize on cost-cutting and anticipate cost increments with increased production.
In short-term decision-making, incremental analysis often involves variable costs, as they reflect the greatest potential for change. When considering additional production, a firm must take into account the variable cost growth relative to how much extra revenue the added output is expected to generate. Neglecting the role of variable costs can lead to suboptimal business decisions and potentially jeopardize profitability.