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Cost Benefit Analysis
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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
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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
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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
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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
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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
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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?
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Cost
Capacity x (4 x level of automation) 800 x (4 x 1) is incremental cost 800 x 4 $3,200
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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
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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?
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Examples Child care at work Vaccinating Healthy Adults for Influenza jobs vs. pollution