Diff b/w Cost Benefit Analysis & Marginal Analysis
Abhay Patny
What is Diff b/w Cost Benefit Analysis & Marginal Analysis?
Both seems to be similar terms
Leung Timothy
What is Diff b/w Cost Benefit Analysis & Marginal Analysis?
Both seems to be similar terms
--
----------------------------------
用加法計算我們的積累
用減法計算我們的消費
用乘法計算我們的投資
用除法計算我們的資源
來自深圳地鐵的溫馨題示
notokord
"Marginal Analysis is one of the key tools used in economic way of
thinking. It is useful for : Cost/benefit analysis, Evaluating
economic efficiency, Maximizing Profits/Utility"
Ref:http://sorrel.humboldt.edu/~economic/econ104/marginal/
Best Wishes
Noto
harwinde...@gmail.com
This is a good question.
Cost Benefit Analysis is comparing cost vs benefit. A Cost Benefit
Ratio of less than 1 is considered favorable. If you inverse the
formula, a Benefit Cost ratio of more than 1 is considered favorable.
Example - you spend an extra $1,000 on a more energy efficient
machine, that saves you $2,000 annually on electricity bill. So, the
cost benefit ratio (Cost divided by Benefit) would be less than 1
(even if you consider interest on the $1,000 additional investment).
If you inverse it, the Benefit Cost Ratio ( Benefit divided by Cost)
will be greater than 1.
Marginal Analysis is a technique where in the effect of changes to a
specific variable on other variables (or project as a whole) are
measured. You can use it to measure the impact of allocating a scarce
project resource to the project.
Let's consider an example. Suppose you are managing a Software
Development project. Your customer will pay you an incentive fee of
$5,000 if you complete your project within 6 weeks.
Now you estimate that it would take 4 programmers 7 weeks to complete
the project. But if you add 1 more programmer (a total of 5
programmers), you can finish the project within 6 weeks. However, the
additional programmer costs you $6,000 more (at the rate of $1,000 per
week for 6 weeks).
Now your marginal cost is $6,000 and your marginal benefit is $5,000.
So, based upon this info, you can see that it isn't worth hiring the
extra programmer in order to earn the incentive fee.
Hope this clears your doubt.
Regards,
Harwinder
PMP Certification Blog: http://deepfriedbrain.blogspot.com
Brijesh Tripathi
Harvinder: Cost-Benefit/Benefit-Cost Ratio that you have mentioned here is actually a technique used in Project Selection... not in Quality Planning where we determine whether it is worth doing a project by way of comparing cost vs. the benefits of the project. While Cost-Benefit Analysis is actually done in Quality Planning. Both your examples I feel belong to Cost-Benefit Analysis.
Before I start, let me tell you guys that PMBOK doesn't even talk about Marginal Analysis in Quality Planning, Rita Mulcahy does. PMBOK mentions only Cost-Benefit Analysis.
In fact Cost-Benefit Analysis and Marginal Analysis in terms of Quality Planning are inseparable just like Milk and water... Cost-Benefit Analysis (Milk) includes Marginal Analysis (water) :-)
Margin Analysis is the name given to the technique used in Cost-Benefit analysis.
In Cost-Benefit analysis, your aim is to determine whether or not to take a Quality Improvement Measure by comparing its cost with the benfit gained out of it. For Ex. a Quality Measure is to add Additional Test cycles in a project. You have to decide whether to add additional test cycles or not. To determine this, you would comapre the cost associated with adding one additional test cycle with its benefits. To make things clearer-- Cost associated with adding a test cycle is the cost of additional effort put for it and benefit of adding one test cycle is avoiding re-work worth certain amount of dollars.
Now suppose you determine that adding a new test cycle costs $100 and benefit gained is equal to value of avoiding rework worth $120.. hence you determine that adding one additional test cycle is benefitial by saving you $120-$100 = $20
Now just because adding one test cycle is benefitial, it doesn't mean that you go upon adding multiple test cycles and still save money by avoiding re-work. This is exactly where Marginal Analysis comes into picture... Marginal Analysis is the name given to the technique of determining how many more test cycles can be added before it starts hurting (meaning the point where the cost of adding further test cycles overshoot the benefit gained).
For Ex. After adding the 1st test cycle (example given above by me), you have saved $20 because cost was $100 but benefit was $120... now you have to determine whether you should add 2nd test cycle or not.. 2nd test cycle should also cost somewhat similar to 1st one i.e. $100 but benefit will not be same.. because using 1st test cycle you would have avoided re-work for 40 defects but now using the 2nd test cycle you might be avoiding the rework for only 35 defects .. hence money saved in 2nd cycle will be $105 (simple maths.. 40 defects cost $120 hence 35 defctes cost $105)... hence you determine that even adding 2nd test cycle is benefitial because cost is $100 and money saved in terms of re-work is $105 (benefit of $5)...
Now you have to decide whether to add 3rd test cycle or not... again you detremine that adding a 3rd test cycle would cost you $100 but it might be saving you from the re-work of only 30 defects... so the money saved here for 30 defects is $90 (simple maths.. because 40 defefcts cost $120 so 30 defects would cost $90)... Now here we see that adding a 3rd test cycle is not benefitial because it costs $100 but saves re-work worth only $90.
Hence, our Cost-Benefit analysis has shown that adding more test cycles is benefitial and at the same time Marginal-Analysis tells where to stop adding more and more test cycles... i.e. don't add after the 2nd test cycle..
hema Sivaramakrishnan
harwinde...@gmail.com
I didn't read through your entire message, but I did 'skim' over the
milk, I mean your post. I'm not sure about the milk and water part
because milk powder companies might object to it :) Whether one falls
under the umbrella of other, I'm also not sure.
In short and simple terms, this is how I understand it:
1. Both are economic techniques that help in decision making.
2. Cost Benefit analysis can help weigh different options and make a
decision. For example, you have 3 projects, with CB ratios 1.1, 1.0
and 0.9. Which one would you choose? Ans: 0.9
3. Yes, marginal analysis is also used in Quality Management, but is
not restricted to Quality Management only. It has other applications,
like the example I gave in my previous post.
If you review my second example closely, it really is talking about
Marginal Analysis. Do you know of that famous phrase used in IT, "It
takes 1 woman 9 months to make a baby, but you cannot have 9 women
make a baby in 1 month.". We use it often to tell the management that
adding additional resources to a project may not help reduce the
duration.
Hope we are on the same page.
Brijesh Tripathi
Dear Harvinder,
I do lots of ANALYSIS on the personal/professional front to make lot many decisions and I call that analysis as Cost-Benefit ANALYSIS and Marginal ANALYSIS :-)
But here in this forum my responses/examples are based upon PMBOK's definition of the terms. As you know PMP exam is very particular about definitions given in PMBOK... no deviation is permitted :-)
Your examples were fantastic... no doubt about it... And we are actually subjected to such situations while managing projects.
But to appreciate the benefits of the milk you need to drink the milk :-) I suggest you read through the entire mail of mine for it to make sense.
Regards,
Brijesh Tripathi, PMP
harwinde...@gmail.com
If you talk of the PMBOK Guide definition, I'm not sure what
'deviation' you found in my message. Marginal Analysis is not
mentioned in the PMBOK Guide. I've mentioned (one of) the general
Project Management application of the technique. It's neither quoted
from a book nor any website. I've just tried to put it in as simple
terms as possible so that people understand it easily.
> Dear Harvinder,
>
> I do lots of ANALYSIS on the personal/professional front to make lot many
> decisions and I call that analysis as Cost-Benefit ANALYSIS and Marginal
> ANALYSIS :-)
> But here in this forum my responses/examples are based upon PMBOK's
> definition of the terms. As you know PMP exam is very particular about
> definitions given in PMBOK... no deviation is permitted :-)
>
> Your examples were fantastic... no doubt about it... And we are actually
> subjected to such situations while managing projects.
>
> But to appreciate the benefits of the milk you need to drink the milk :-)
> I suggest you read through the entire mail of mine for it to make sense.
>
> Regards,
> Brijesh Tripathi, PMP
>