Opportunity Cost BenefitCost BC Analysis What is an

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. • https: //www. youtube. com/watch? v=h. R 5 E 7 Y 4 Dxuc

Ahh…. . To study or not to study

How is it done? Examples • Jack has $350 on him and he wants to buy a PS 4. It is also his bfffff’s birthday and he wants to buy them a gift. What is the opportunity cost if Jack buys the PS 4? • 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 • https: //www. youtube. com/watch? v=W-GEZAthj. Ck (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 = 2. 4 2. Axtmayer’s beanie babies Why? Axtmayer: 10, 000/8. 5 = 1, 176 Hopkins: 17, 512/15 = 1, 167