Cost-benefit ratio shows the advantage or disadvantage of a product, service or capital asset from a monetary standpoint. The ratio compares the revenues of this item against the direct costs associated with the item. When the costs exceed the revenues, you will have a negative cost-benefit ratio. This indicates that the disadvantages of the item monetarily outweigh the benefits.
1. Determine the total revenue associated with a product, service or capital asset over a specified period of time. For example, assume that the sale of a product results in $200,000 in revenue. This figure represents the total benefit of the product.
2. Determine the direct costs associated with producing the product. Direct costs include all expenses directly related to the production of the product such as labor, raw materials and shipping. For example, assume the direct costs associated with the product are $50,000. This figure represents the total costs associated with the product.
3. Determine if the cost exceeds the benefit. If the cost exceeds the benefit, you will have a negative cost-benefit ratio. On the other hand, if the benefit exceeds the cost, you will have a positive cost-benefit ratio. Continuing the same example, since the $200,000 benefit exceeds the $50,000 cost, you would have a positive cost-benefit ratio.
4. Divide the total benefit of the product by the total cost of the product. Continuing the same example, $200,000/$50,000 = 4 or 4-to-1. This figure represents the cost-benefit ratio for the product.
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