![]() Example 7Ī company finds that a new supplier will provide them with raw material for $50 a ton instead of $55 a ton. You may weigh the benefit of spending time with your friends at the dinner party against the opportunity cost of not working and earning overtime pay. You'd like to attend a dinner party with your friends, but you have an opportunity that evening to earn some overtime. The project is likely to provide value in the long term. The company estimates that over the next 10 years, the improvements will save it $250 million through improved efficiency. An analysis finds the plan will cause a temporary disruption of production, costing another $10 million, plus lead to increased regulatory scrutiny, adding another $5 million annually in cost. Example 5Ī company intends to spend $50 million upgrading technology to improve production. The benefits of the project are likely to be worth the $100 million expenditure. An analysis finds that the program will spur close to $1 billion in economic activity through improved travel time, generating $150 million in tax revenue. Example 4Ī government plan that costs $100 million will improve transportation infrastructure. Although there are short-term costs, the increased market share might justify the merger. The company estimates it could significantly increase production through the acquisition, while increasing sales for many years. Merging the two companies would cost an additional $10 billion. Example 3Īn auto manufacturer is considering buying a rival company for $25 billion to increase market share. The company can use this new information to prevent losses and make a decision that takes the company in a positive direction. ![]() Market forces and other factors indicate the benefit of the project has declined. Example 2Ī company has spent $2 million on an initiative and plans to spend another $1 million. ![]() The investment in the system probably is likely worth the reduction in cost. An analysis finds the system will reduce delivery time and increase the restaurant's capacity to fill orders, generating $1.5 million in additional sales and $500,000 in cost reduction. Here are some examples of using the cost-benefit principle in decision-making: Example 1Ī restaurant owner is considering a new system to take orders from customers. ![]() Related: Learn About Being a CPA (Certified Public Account) 10 examples of the cost-benefit principle Potential long- and short-term reductions of cost because of increased efficiencyĮxpansion of market share and the long-term impacts of greater market share The cost-benefit principle can help determine: If the principle determines the cost outweighs the potential benefits, the action likely is not worth taking. The principle can provide perspective in assessing whether the project is in the best interests of a company or an organization. The cost-benefit principle is important because it can provide valuable insight when making a significant decision. Related: Learn About Being a Financial Analyst Why is the cost-benefit principle important? The principle broadly applies to capital investments, technological upgrades and other initiatives such as new products or even a change in company mission. The cost-benefit principle involves determining costs and comparing them to estimated benefits. The cost-benefit principle is a process to determine if the cost of an action is worth the potential benefit it provides. Related: How To Become a Financial Analyst What is the cost-benefit principle? In this article, we define the cost-benefit principle, how to use it and the benefits it provides. The cost-benefit principle can be a helpful asset in formulating decisions and presenting proposals. The principle can provide clarity in decision-making and guide a company's priorities. The cost-benefit principle can help determine whether an action is worth taking by examining its potential costs and potential benefits. ![]()
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