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

Example Costs New computers = 22,000 Training costs = 4,200 Lost time = 3,700 Total Costs 29,900 Benefits Double orders placed during shift = $14,000 per year Improved 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 = 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