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Cost Benefit Analysis Example

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More Costs

The typical failure of a cost benefit analysis is not including all the costs. In the case of the stamping machine, here are some of the overlooked costs:
  • Floor Space
    Will the machine fit in the same space currently occupied by the three workers?
  • Installation
    What will it cost to remove the manual stampers and install the new machine? Will you have to cut a hole in a wall to get it in or will it fit through the door? Will you need special rollers or machinists with special skills to install it?
  • Operator?
    Somebody has to operate the machine. Does this person need special training? What will the operator's salary, including overhead, cost?
  • * Environment
    Will the new machine be so noisy that you have to build soundproofing around it? Will the new machine increase the insurance premiums for the company?

Accurate Cost Benefit Analysis

Once you have collected ALL the positive and negative factors and have quantified them you can put them together into an accurate cost benefit analysis.

Some people like to total up all the positive factors (benefits), total up all the negative factors (costs), and find the difference between the two. I prefer to group the factors together. It makes it easier for you, and for anyone reviewing your work, to see that you have include all the factors on both sides of the issues that make up the cost benefit analysis. For the example above, our cost benefit analysis might look something like this:

Cost Benefit Analysis - Purchase of New Stamping Machine
(Costs shown are per month and amortized over four years)

  1. Purchase of Machine .................... -$20,000
    includes interest and taxes
  2. Installation of Machine ..................... -3,125
    including screens & removal of existing stampers
  3. Increased Revenue .......................... 27,520
    net value of additional 100 units per hour, 1 shift/day, 5 days/week
  4. Quality Increase Revenue ..................... 358
    calculated at 75% of current reject rate
  5. Reduced material costs ...................... 1,128
    purchase of bulk supply reduces cost by $0.82 per hundred
  6. Reduced Labor Costs ....................... 18,585
    3 operators salary plus labor o/h
  7. New Operator ................................. -8,321
    salary plus overhead. Includes training
  8. Utilities ............................................ -250
    power consumption increase for new machine
  9. Insurance ......................................... -180
    premiums increase
  10. Square footage ...................................... 0
    no additional floor space is required

Net Savings per Month ........................... $15,715

Your cost benefit analysis clearly shows the purchase of the stamping machine is justified. The machine will save your company over $15,000 per month, almost $190,000 a year.

This is just one example of how you can use cost benefit analysis determine the advisability of a course of action and then to support it once you propose the action.

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