Case Problem

Some important concepts in cost-benefit analysis are as follows:

1. Measurable benefit. Benefits or cost savings may be measured directly or may be based on estimates of expected value. An expected loss is an estimate of an amount of probable loss multiplied by the frequency or probability of the loss-causing event. A measurable benefit can arise from a reduction of an expected loss.
2. Qualitative benefit. Some gains or cost savings may not be measurable, such as company public image, reputation for regulatory compliance, customer satisfaction, and employee morale.
3. Measurable costs. Controls may have fixed costs, such as wages and equipment expenses.
4. Qualitative cost factors. Some costs may be indirect, such as lower employee morale created by over-controlled work restrictions.
5. Marginal analysis. Each successive control feature may have marginal cost and benefit effects on the control problem.

Costs and Benefits of Control Case Problem

The Ocean View Cafeteria formerly collected from each customer as they reached the end of the food line. A cashier, seated at a cash register, rang up the amount (displayed on a digital screen) and collected money.

Management changed the system, and now a clerk at the end of the line operates a calculator/printer machine and gives each customer a paper tape. The machine accumulates a running total internally. The customer presents the tape at the cash register on the way out and pays.

The cafeteria manager justified the direct cost of $30,000 annually for the additional salary and $500 for the new machine by pointing out that she could serve 4 more people each weekday (Monday through Friday) and 10 more people on Saturday and Sunday.

The food line now moves faster, and customers are more satisfied. (The average meal tab is $12, and the total costs of food and service are considered fixed.) Besides, she said, my internal control is better.

Evaluate the managers assertions.