Cost Benefit Analysis

Process to compare the benefits of a decision with the costs

Widely used in some form throughout business

Often used to decide whether or not to complete a project

Example New order-tracking software Department doesn’t have many computers Workers aren’t skilled May allow more orders to be placed May increase service to customers

ExampleCostsNew computers = 22,000

Training costs = 4,200Lost time = 3,700

Total Costs 29,900

BenefitsDouble orders placed during

shift = $14,000 per yearImproved service = $3,000

per year

Total Benefit per year = $17,000

Difficulties: Including all costs and benefits

More floor space needed? Cost to remove other equipment? Repairs and upgrades to system?

Attaching dollar estimates to items Increased sales Lost time for workers while training

Some things may be important but have no financial impact or be negative

Ethical choices Satisfying a large customer Workers may be happier

Time Value of money $1 is worth more now than in the future

Simulation

Currently: Automation is level 3.0 Producing 1300 units Capacity = 800 units Labor cost = $13.49 per unit What is the cost benefit of increasing

automation by one unit?

Cost

Capacity x (4 x level of automation) 800 x (4 x 1) is incremental cost 800 x 4 $3,200

Benefit

Each level of automation lowers labor cost per unit by $1.12

Production = 1300 1300 x 1.12 = $1,456 in savings each round 2.20 rounds it has paid for itself

Issues for Decision Will production level change? Will capacity change? Will everything stay the same for two rounds? Do you have the money to invest in

automation now?

Examples Child care at work Vaccinating Healthy Adults for Influenza jobs vs. pollution