Sunk cost refers to those costs that have already been incurred and thus cannot be recovered.
Nonroutine decisions are the decisions which are taken when an uncommon situation occurs. These are those situations which the manager has never dealt before and not even similar ones. So, Nonroutine decision making is quite risky and includes lot of anxiety and stress.
Sunk cost should be carefully excluded from the Nonroutine decision analysis.
This is because the key in non routine analysis is to look to the future rather than past but sunk cost is the costs that has already incurred in the past. This is the reason why sunk costs should be not be considered in non routine decision analysis.
Average cost is referred as per unit cost of goods produced. It is calculated by dividing the total cost by the number of goods produced. The total cost includes fixed and variable cost.
However, marginal cost calculates the amount of change in the total cost , when an additional unit is produced.
Average cost is computed by using the formula:
While the formula to calculate marginal cost is:
Thus, marginal cost determine the cost of producing one additional unit of output.
With the acceptance of proposal the additional 10 surgeons will generate 20 patients. Hence surgeries by each surgeon lead to total 200 surgeries.
The Reimbursement on each surgery is $28000.The average cost of each surgery (100 surgeries anticipated) is $27,800 while the Marginal cost of each surgery (100 surgeries additional) is $26,400.
In order to determine that whether the firm should start business or not then profit/loss should be calculated on each surgery.
Calculate total revenue using the formula.
Hence the total revenue for the organization will be $5,600,000.
Calculate total cost using the formula.
Thus, the total cost amounts to $5,420,000.
The total revenue exceeds the cost. Hence, calculate the profit using the formula.
As it is clearly seen that hospital H would receive a profit of $180,000 so it should accept the proposal.
Cost-benefit analysis and Cost-effectiveness analysis are the sub-types of decision analysis. Decision analysis refers to the technique which helps to make decisions under conditions of uncertainty. These techniques attempt to weigh the pros and cons of a decision.
Differences between cost-benefit analysis and cost-effectiveness analysis are listed as follows:
1. Cost-benefit analysis is a systematic approach of measuring the economic worth of a project or investment whereas the cost-effectiveness analysis is that approach that calculates the monetary value of all project costs.
2. Cost-benefit analysis measures costs and benefits expressed in terms of monetary units whereas the cost-effectiveness analysis measures the project results in units rather than monetary figure.
3. Cost-benefit analysis is the only approach which determines that whether the benefits of an action exceed its costs whereas the cost-effectiveness analysis cannot determine it.