Examples of Cost-benefit analysis in the following topics:
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- The government uses cost-benefit analysis to decide whether to provide a public good.
- The government uses cost-benefit analysis to decide whether to provide a particular public good and how much of it to provide.
- Cost-benefit analysis, which is also sometimes called benefit-cost analysis, is a systematic process for calculating the benefits and costs of a project to society as a whole.
- The positive and negative effects captured by cost-benefit analysis may include effects on consumers, effects on non-consumers, externality effects, or other social benefits or costs.
- These costs and benefits will need to be translated into monetary terms for the sake of analysis.
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- The government is providing an efficient quantity of a public good when its marginal benefit equals its marginal cost.
- The public good provider uses cost-benefit analysis to decide whether to provide a particular good by comparing marginal costs and marginal benefits.
- Cost-benefit analysis can also help the provider decide the extent to which a project should be pursued.
- Output activity should be increased as long as the marginal benefit exceeds the marginal cost.
- An activity should not be pursued when the marginal benefit is less than the marginal cost.
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- The cost or benefit of the single decision is called the marginal cost or the marginal benefit.
- By subtracting the cost from the benefit, Car A offers $5,000 of marginal benefit, Car B offers $3,000, and Car C offers $10,000.
- Note that you are concerned not with your total or average cost and benefit (assuming no resource or other external restrictions), but with the marginal cost and benefit.
- The tools of marginal analysis can illustrate the marginal costs and the marginal benefits of reducing pollution.
- At point $Q_c$, the marginal costs will exceed the marginal benefits.
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- Basically, this Marginalist Revolution was the application of calculus to economic analysis.
- Marginal analysis is the analysis of rates of changes in variables.
- It is crucial to remember that the marginal value (cost, benefit, etc) is the value associated with a specific choice.
- The answer depends on our analysis of the benefits and costs of each unit of berries we pick.
- The first units of berries are picked because the marginal benefit of each unit (MB) is greater than the marginal cost (MC).
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- Opportunity cost refers to the value lost when a choice is made between two mutually exclusive options.
- Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen).
- Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility are also considered implicit. or opportunity, costs.
- In the context of cash flow analysis, opportunity cost can be thought of as a cash flow that could be generated from assets the organization already owns, if they are not used for the project in question.
- However, there are possible implicit benefits, such as autonomy and freedom to be "your own boss", and implicit costs, such as the stress of running your own business.
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- A complete cost appraisal is also necessary as part of the business analysis.
- However, the following cost items are typical:
- Operating costs that account for possible economies of scale and learning curves
- Based on these costs, the business analysis stage will estimate the likely selling price.
- Customers base buying decisions on a personal value equation where the value is calculated by weighing the cost versus the benefits.
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- Although this is a natural consequence of variability in profitability across customers, firms benefit from knowing exactly who the best customers are and how much they contribute to firm profit.
- With this information in hand, a customer profitability analysis can be prepared.
- What kinds of useful information can you gather from an analysis such as this?
- Many companies prepare a similar type of analysis at the gross margin level and skip the step of trying to allocate costs to individual customers.
- In this case, cost of goods sold is substituted for "allocated costs" in column three of Exhibit 40, and column four will show gross margin by customer instead of profitability by customer.
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- Inventory costs depends on methods used, which include Specific Identification, Weighted Average Cost, Moving-Average Cost, FIFO, and LIFO.
- It also may include ABC analysis, lot tracking, cycle counting support, etc.
- These number will need to be estimated, therefore reducing the specific identification's benefit of being extremely specific.
- Weighted Average Cost is a method of calculating Ending Inventory cost.
- Each time, purchase costs are added to beginning inventory cost to get Cost of Current Inventory.
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- Improved inventory management can lead to increased revenue, lower handling and holding costs, and improved cash flows.
- Management of the inventories, with the primary objective of determining/controlling stock levels within the physical distribution system, functions to balance the need for product availability against the need for minimizing stock holding and handling costs.
- It also may include ABC analysis, lot tracking, cycle counting support, etc.
- All of these practices leads to optimal product storage, helping minimize holding and handling costs.
- This also saves handling and holding costs.
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- The process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight.
- The rational model of decision making assumes that people will make choices that maximize benefits and minimize any costs.
- They will then compare prices (or costs).
- In general, people will choose the object that provides the greatest reward at the lowest cost.
- Its objectivity creates a bias toward the preference for facts, data and analysis over intuition or desires.