Report on Cost Benefit Analysis to Maximize Revenue and Profit

Use of Cost Benefit Analysis to Maximize Revenue and Profit

Introduction of Cost Benefit Analysis to Maximize Revenue and Profit

Managers take several decisions in an organization to keep an organization sustainable and outpacing in the competitive market. A cost benefit analysis is used to analyze the decision that how could be use for the benefits in the different situation associated with the cost. It could be used by experts that methods are used to get the cost benefits. They make decisions regarding project selection and product selection to identify and select the most suitable one. There are different problems which could be faced by the management while implementing the cost benefits analysis in the organization which are used to reduce to gain these benefits. For this purpose, they consider several factors in their analysis. For instance, how much cost is inquired by the project or product introduction and how much potential each option has to produce financial benefits for the company? Cost benefit analysis method is the best option for project selection. The present work is about the use of cost benefit analysis in an organization to maximize its revenue and profit outcomes over the selected time duration. In the present work, research findings and information extracted from the literature review is presented in detail as well as there may be some problems regarding the company project. Moreover, present work contains an analysis of an example about ABC Company.

Cost Benefit Analysis for Revenue and Profit Maximization

Cost benefit analysis is an important tool in the project or business management. Manager of an organization devises this tool to ensure evaluation of costs associated with the Manager of an organization devises this tool to ensure evaluation of costs associated with the operations as well as benefits of these operations. operations as well as benefits of these operations. Regarding this, they cater a list of all linked expenditures and allocated cost of operations. After this, they collect data about expected sales in the same time duration to determine the value of profit or benefit. The benefit can be calculated by using any technique such as internal rate of return (IRR), return on investment (ROI), payback period (PP), and net present value (NPV).Following research findings, organizational management calculates a net present value (NPV) and the payback period of the available list of projects to understand the actual return of a project. However, such techniques are preferable for complex situations only. For example, if a project relates to more than one year duration then the value of returns will also get influence from the change in interest rate, inflation rate, and currency value (appreciation or depreciation of the currency). Therefore, managers also apply techniques concerning with time value of money to get the exact idea about the benefit of a project.

 Cost benefit analysis considers this requirement and provides a clear overview of the possible benefit ratio from all available projects based on calculated NPV. For instance, if an organization is interested to invest in a project with a useful life of 5 years, then while conducting cost benefit analysis, managers will also calculate the increase or decrease in the value of money over the selected time duration. Based on this analysis it is possible that managers may conclude that a project (A) with relatively higher time span (5 years) is less beneficial for the company as compared to the project (B) with lower time span  (2 years) even when the project (A) has a higher value of cost benefit ratio in simple CBA analysis. A key reason behind this is relatively minor changes in the money value for 2 years in comparison to

changes recorded in the money value of the project with 5 years lifespan. Therefore, using this cost benefit analysis technique managers of an organization can better decide about the profit of available projects. 

Furthermore, managers also use cost benefit analysis to calculate possible revenue of a project or available alternative projects while deciding the matter of selection. Moreover, regarding economic cost benefit analysis decision makers also calculate marginal costs on product quantity and offered prices(Enviroliteracy.org, 2020)(Campbell & Brown, 2003)(Annema, Frenken, Koopmans, & Kroesen, 2016). See the presented below graph for cost benefit analysis in the determining product price at quantity.

                                                                                      

Figure 1 Cost Benefit Analysis

Source: http://www.economicsdiscussion.net/cost/cost-benefit-analysis/cost-benefit-analysis-with-diagram/13147

Problem /Case Overview of Cost Benefit Analysis to Maximize Revenue and Profit

To elaborate on the use of cost benefit analysis a problem or case is developed. The case relates to a service providing company <<ABC Company>>. ABC Company works in the IT sector with limited resources and targeted market. This could be easy to implement but there is also some problems which must be identified in the IT department. However, gradual success in the business encouraged the administration of the company to introduce a new project regarding business expansion with the purpose to increase sales revenue. Considering this goal, the company has identified two projects (project A and project B) for one-year duration only. Managers require selecting the project with higher chances of profit and sales.

Available Alternative Projects of Cost Benefit Analysis to Maximize Revenue and Profit

Project A is about the presentation of new IT benefits in the equivalent focused on advertise. In spite of, administrations would identify with advanced showcasing in this manner the organization would require more asset for the usage of the arrangement. Secret weapons incorporate equipment and programming and HR. A normal expense of required equipment and programming is around 15,000. While the normal increment in income and extra deals income are around 340,000 (yearly). Task B is tied in with propelling new administrations of site traffic the board. Task B will require more assets of equipment and programming when contrasted with venture A. A normal expense of equipment and programming is around 20000. Be that as it may, different costs, for example, wages, pay rates, and enlisting cost are the equivalent for the two undertakings (150,000 and 20,000 separately). Some way or another, the normal income and extra deals income are around $280,000 for venture B.

Objectives of Cost Benefit Analysis of Cost Benefit Analysis to Maximize Revenue and Profit

Based on this cost and benefit analysis we can determine whether a decision is favourable for the company or not? Mainly there are two main purposes behind cost and benefit analysis which is enlisted below:

1)      The first purpose of cost benefit analysis is to determine whether a project is feasible and justifiable by figuring out benefits outweigh costs.

2)      The second key purpose of cost benefit analysis is toprovide a baseline for all available projects in an organization to determine or select the project with greater benefits in comparison to the cost and other projects.

Steps and Stages in Cost Benefit Analysis of Cost Benefit Analysis to Maximize Revenue and Profit

Cost benefit analysis is simple to take for the project management teams and organizational management. The key steps to be taken for the cost benefit analysis are presented below:

1)      The first step is to develop goals and objectives for the project. Goals development is important to get a clear and definite idea regarding the project.

2)      Select alternative project options meeting with the pre-defined project objectives and goals.

3)      Identify key stakeholders for the project and determine their interest in the project. It will support the project or business management team to select the project with the most required outcomes.

4)      The next step is to measure and determine all costs associated with the project and available alternative project options. Proper identification can provide a realistic overview of the possible project outcomes in monetary terms.

5)      The next step of cost and benefit analysis is to calculate the outcomes of the project in terms of benefits. Here in this step, management needs to calculate revenue and sales of the project or business idea over the selected time period.

6)      The next step is optional. Here managers need to make sure all values of cost and benefit are in the same currency.

7)      The next stage is to use different techniques for the calculations of discounted benefits and costs associated with the projects.

8)      Now managers can perform sensitivity analysis to conclude the possible impact of uncertainties.

9)      In the last step, managers are required to recommend the preferred alternative or most suitable project for the company.

Calculations and Results of Cost Benefit Analysis

Following these steps and information, cost benefit analysis is taken for the ABC organization.The following will represent the calculation of cost benefit analysis. For instance, ABC Company has two available projects to start for the goal of an increase in sales revenue. The cost benefit analysis of both projects will be calculated as:

                                              

                     

Project A		Project B
	$		$
Benefits		Benefits
Increase in Revenue	300000	Increase in Revenue	260000
Increase in Additional Sales Revenue	40000	Increase in Additional Sales Revenue	20000
Total Benefits	340000	Total Benefits	280000
Costs		Costs
Salary and Wages	150000	Salary and Wages	150000
Hiring Cost	20000	Hiring Cost	20000
Hardware and Software	15000	Hardware and Software	20000
Total Cost	185000	Total Cost	190000
Cost Benefit Ratio	1.837838	Cost Benefit Ratio	1.473684

In the above presented table of cost benefit analysis, both projects have almost the same total cost (185000, and 190000) of project activities execution. The only difference between the cost is caused by a difference of $5000 in hardware and software purchase cost of both projects. Somehow, cost benefit analysis represents that still project A is a better option for the organization as compared to project B. According to the research and literature review, a better cost benefit ratio is more beneficial for the company as compared to the lower ratio of cost benefit analysis. Relating to this, it can be said that project A with 1.83 ratios is a more suitable or better option than project B with 1.47 cost benefit ratio. See the presented below graph representing cost and benefit lines for both projects A and B.

                                           

According to research cost and benefit analysis support in the maximization of revenue and sales in an organization. For instance, in the above stated table, project managers and organization selected the project with higher cost benefit ratio that indicates higher profitability for the company over the period. In general, cost benefit analysis enables the management to select the project or option that deliver them more profit and revenue. Excluding the above example, managers also consider other important details regarding return and benefit while analyzing the cost and benefits of a project. Nevertheless, in this case, project duration was limited to one year only, therefore, change in money value will not generate a higher impact on project profit. Therefore, ABC Company only requires simple cost benefit analysis for its project selection rather than requiring NPV, and payback period calculations.

According to the research cost benefit analysis has some advantages and disadvantages that should be considered by the managers or business initiators while deciding a matter base upon cost benefit analysis.

Advantages of Cost Benefit Analysis to Maximize Revenue and Profit:

1)      Cost benefit analysis is the most simple and easy to understand the technique for the calculation of profit or benefits(Suman, 2020).

2)      Cost benefit analysis is a reliable approach to calculate benefits in a fixed budget scenario.

3)      Cost benefit analysis can be used for the calculation of tangible and intangible benefits (both).

Disadvantages (limitations) of Cost Benefit Analysis to Maximize Revenue and Profit:

The major limitations or disadvantages of cost benefit analysis are enlisted below:

1)      Cost benefit analysis fails to provide realist results for subjective values and analysis.

2)      Cost benefit analysis ignores opportunity cost in the decision making process.

3)      Externalities related problem is also a major limitation of cost benefit analysis technique.

Recommendations for Profit and Revenue Maximization

            In this section, some recommendations are presented which relates to the above discussion.

1)      First of all, managers of an organization should consider the time duration or lifespan of a project while deciding to use cost benefit analysis and any other technique for project selection.

2)      Secondly, managers or decision makers should consider the time value of money for the projects if it relates to more than one year duration (or any time duration that contributed significant changes for money value).

Conclusion of Cost Benefit Analysis to Maximize Revenue and Profit

The whole discussion concludes that cost and benefit analysis is the important evaluation method used by the organizations to select a project or an option for the business. Cost and benefit analysis make decision making process easy for the managers and other decision makers. Managers also use cost benefit analysis to calculate possible revenue of a project or available alternative projects while deciding the matter of selection. Moreover, regarding economic cost benefit analysis decision makers also calculate marginal costs on product quantity and offered prices. There are objectives which are explained in the paper to gain the benefits in the company within the project cost. One of the advantages of utilizing net present an incentive for settling on a venture is that it utilizes an elective pace of return that could be earned if the task had never been finished. That arrival is limited from the outcomes. At the end of the day, the venture needs to procure in any event beyond what the pace of return that could be earned somewhere else or the markdown rate. An example of ABC Company was requiring the selection of a project to increase its sales revenue or profit in one year duration. Cost benefit analysis taken for ABC Company concluded that project A with higher cost benefit ratio is a suitable option to increase sales revenue and profit. Conclusively, the analysis represents that revenue and profit can be increased by the wise selection of projects using cost benefit analysis.