Opportunity Cost & Benefit/Cost (B/C) Analysis. What is an opportunity cost? Opportunity cost is about decision making. When you choose to do 1 thing,

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Presentation transcript:

Opportunity Cost & Benefit/Cost (B/C) Analysis

What is an opportunity cost? Opportunity cost is about decision making. When you choose to do 1 thing, you choose Not to do something else. The OC is the next BEST choice.

Ahh….. To study or not to study

How is it done? Examples Jack has $350 on him and he wants to buy a PS4. It is also his bfffff’s birthday and he wants to buy them a gift. What is the opportunity cost if Jack buys the PS4? Sara wants to go to a party this weekend. She also has a math test to study for. What is the opportunity cost if Sara studies for her math test instead?

Business Costs (4 kinds) 1. Fixed Costs – expenses you have no matter how busy/not busy you are (ex. Health insurance for workers). 2. Variable costs – costs that vary depending on what business produces (ex. Electricity) 3. Total costs = FC + VC Marginal Cost – increase in expenses caused by making one more item/service

Revenue (2 kinds) 1. Total Revenue – money business gets from selling all its goods and services 2. Marginal Revenue – additional income from one extra sale of good/service RULE = Businesses keep producing items/services as long as MR> or = MC (stop before get to question about waste 1:33 min)

Chipotle Store

What is Benefit/Cost analysis used for? In business, it is used to evaluate what decision one should make by looking at the cost and comparing it to its benefit.

How is it done? You take the expected outcome (benefit) and divide it by the cost it takes to reach that outcome. Whichever number comes out higher is the decision one should make. B/C Analysis = Gain ( $, product) Investment ( $, time)

This sounds valuable. Can you show me an example? Sure! Take this into consideration : Mrs. Seiders wants to take her millions from Five Below sales and invest it. Bucko’s Inc. is offering investors $350 for every $150 invested. The Schulze’s Corp. is offering $275 for every $100 invested. What decision should Mrs. Seiders make?

These are the answers Bucco’s Inc. – 350/150 = 2.3 Schultze Corp. – 275/200 = 2.75 Based off the math, Mrs. Seiders should invest in the Schultze Corp. Why? For each $1 she invests, she gets $.45 more with Schultze Corp then with Bucco’s Inc.

Now you try… 1.Timmins Global is offering $70 for an investment of $25. Luccia Inc. is offering $110 for an investment of $45. Which company should I invest in? 2.You are the owner of a company that makes beanie babies. Your employees say they can make 10,000 Axtmayer beanie babies in 8.5 hours or 17,512 Hopkins beanie babies in 15 hours. Which should you choose?

Answers 1.Timmins Global Why? Timmins: 70/25 = 2.8 Luccia: 110/45 = Axtmayer’s beanie babies Why? Axtmayer: 10,000/8.5 = 1,176 Hopkins: 17,512/15 = 1,167