Question

Scenario: Imagine that you have just stepped into a new role as the office manager for a very successful clinic. The clinic is a conglomeration of physicians who offer specialized care. One of the physician's groups in the clinic would like to purchase an MRI machine. Currently, clients who need an MRI must schedule an appointment at another facility, adding time and cost to any treatment they may need. The machine will be available for all the physicians in the clinic and will require additional staff to operate the equipment and the office area where it will be housed.

1. Prepare a cost-benefit analysis by using the template below to present to the physicians so they may decide whether to move forward with the purchase. Be sure to consider the non-monetary costs, such as productivity, as well as the non-monetary benefits, such as improved customer satisfaction. Although these may be difficult to quantify, they are important costs and benefits that must be considered.

2. Answer the following below based on the cost-benefit analysis you created:

• How a cost-benefit analysis aligns with organizational needs
• Explain the concept of opportunity cost.
• Explain how the cost-benefit analysis aligns with organizational needs and future growth.
• Recommend a plan of action that is supported by the cost-benefit analysis. (Should the clinic purchase the MRI machine, or not?) Reference specific areas of the analysis in your recommendation.

Answer 1

In terms of business decision-making, you can use the methodology to analyze a wide variety of situations:

• To evaluate whether a capital investment is worth it.
• To decide whether to hire new employees.
• To determine whether a project or operating change is feasible.
• To develop a benchmark for comparing projects.
• To weigh up one marketing initiative against another.
• To appraise the desirability of a proposed policy.

In many ways, the cost-benefit equation is what business is all about. Spending money (costs) to creating value (benefits) is what businesses do, so customers will buy from you and you can turn a profit. Introducing a formal process for assessing the cost and benefit of making the proposed changes simply adds rigor to something your business is already doing each day.

In this way cost benefit analysis can be useful for the organisation.

OPPORTUNITY COSTS:

Opportunity cost refers to the value of the other choice sacrificed while choosing a better or suitable alternative. It is also termed as alternative cost. There are limited resources or limited spending capacity and to direct these resources in the direction of deriving maximum satisfaction, we find out the opportunity cost.

Signifance of the opportunity cost:

• Base for Decision Making: Opportunity cost provides support for making an appropriate choice while selecting one out of many available alternatives.
• Price Determination: Based on the expenses incurred in the procurement of any goods or services along with the cost which may have been committed to acquiring alternative options, the price of the products or services is determined.
• Efficient Resource Allocation: It helps in investing the resources in the right opportunity by analysing the opportunity cost of all the alternatives.
• Remuneration Decisions: In organisations, it played a crucial role in determining the expected value an employee would create for the organisation. It is acquired after his/her comparison to the other alternatives available, and thus, personnel remuneration is considered accordingly.