The Concept of Cost-benefit Analysis | Discussion

Cost-benefit analysis is an important concept used in decision-making. It is used for evaluating a project or decision, or for choosing between several alternatives. In each case, both positive and negative aspects of the decision should be evaluated. The approach includes both quantitative and qualitative factors, and in most cases the impact of qualitative factors is quantified to achieve comparability (Bragg, 2009). When one decision is considered, then it may be accepted if the overall value is positive (i.e. benefits outweigh the costs). When several decisions are compared, then the decision with the highest positive balance of benefits versus costs is chosen.

The four decision-making steps using a cost-benefit analysis are: a) discovering the need or problem; b) identifying alternatives; c) analyzing costs and benefits of these alternatives and d) choosing the optimal alternative (Bragg, 2009). These steps of cost-benefit analysis can be efficiently used for making personal decisions. An example of such decision is the choice of grocery purchases schedule. Let us apply the four cost-benefit analysis steps to this decision.

Step A: the need is to select optimal schedule of purchasing groceries, so that time and costs would be optimized. Step B: there are two main alternatives -making regular purchases in a local grocery store which is located close to home, or to purchase the groceries in a discount store or wholesale store located 10 miles away. Local purchases are typically made 3-4 times per week, and discount/wholesale purchases happen once a week.

Step C: it is necessary to evaluate pros and cons of each alternative. To simplify the analysis, let us assume the family needs 4 dozens of eggs, 6 quarts of milk and 5 loafs of bread per week. Table 1 displays the prices in Trader Joe’s (local store close to the home location) and Walmart prices (discount store).

Product Need WMT Prices WMT Total TJ Prices TJ Total
Eggs 4 $2.67 $10.68 $3.69 $14.76
Milk 6 $1.98 $11.88 $2.29 $13.74
Bread 5 $2.78 $13.90 $2.99 $14.95
Total $36.46 $43.45

Table 1. Computing weekly basket price for two alternatives

It is possible to see that the difference in weekly basket price is $6.99. It is also necessary to account for the cost of gas and time spent on the purchase in the second alternative, and the total amount of time spent on weekly purchases in the first option. With regard to time, regular weekly visits typically take 15 minutes each, resulting in 45 minutes’ total. One weekly visit to a discount store would incur $0.18 (gas per mile) * 10 miles= $1.8 gas cost, and overall time needed for this would be 30 minutes. Let us assume that the price of 1 hour is $22 (median workers’ price in USA). Then the total cost (including qualitative factors such as time) of the first alternative is $43.45 + $22 * 45/60 = $59.95, and the total cost of the second alternative is $36.45 + $1.8 + $22 * 30/60 = $49.25. The final difference is $10.7 in favor of the second alternative. Therefore, making grocery purchases in a discount store once per week is the optimal course of action in this case.

References

Bragg, S.M. (2009). Just-in-Time Accounting: How to Decrease Costs and Increase Efficiency. John Wiley and Sons.

The terms offer and acceptance. (2016, May 17). Retrieved from

[Accessed: March 28, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016.

[Accessed: March 28, 2024]

freeessays.club (2016) The terms offer and acceptance [Online].
Available at:

[Accessed: March 28, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 28, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 28, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 28, 2024]

"The terms offer and acceptance." freeessays.club, 17 May 2016

[Accessed: March 28, 2024]
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