Question

Perform a Cost and Benefit Analysis for a company of your choice. Where would you recommend that the company should focus on cost reduction? Justify your recommendations with economics.

Answer 1

In an example, a financial technology startup is expanding and adding two new programmers. The CEO of the company decides to run a cost benefit analysis to determine whether the decision will be beneficial to the company - and to what degree.

The company is analyzing a time horizon of one year, and estimates that revenue would increase some 50% if the two programmers were hired.

On the cost side of the equation, the CEO must examine the cost of the two programmer's salaries - estimated at $75,000. Additionally, there is the cost of recruitment, which might be around $3,000. Training could add an additional $4,000.

Additionally, there is the cost of new work areas and computers, totaling $5,000, and the cost of additional licensing for software and the like, around $2,000.

The total direct and indirect costs would total around $89,000.

When calculating benefits, the CEO would examine the benefit of additional revenue within a 12 month period, estimated around $100,000. Additionally, the increase in product quality resulting from the new programmers (and therefore presumed customer satisfaction) would increase by 10%, adding an estimated $10,000 in value to the company.

In total, the benefits would be $110,000. Using the benefit-cost ratio equation, that would be BCR = $110,000/$89,000, or 1.24. Given that the value is positive (and the total benefits are greater than the total costs), the cost benefit analysis indicates the decision to hire two additional programmers would be a beneficial move for the company.