Cost Efficiency: Definition & Analysis

Cost Efficiency: Definition & Analysis
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  • 0:03 Introduction to Cost…
  • 1:16 A Cost Benefit Analysis
  • 1:53 A Cost Effectiveness Analysis
  • 2:23 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting
In this lesson, we'll learn about cost efficiency. We'll also define the term and look at the two components that often make up cost efficiency: cost benefit and cost effectiveness. The lesson will conclude with a summary and a quiz.

Introduction to Cost Efficiency

Meet Josh! Josh owns his own hunting business where customers can purchase hunting clothing and equipment and try out their skills at an indoor shooting range. While business has always been good, Josh is considering expanding a bit and offering classes for hunters of all skill levels.

In order to do so, Josh has to make sure his profits are substantial enough to support the new expenses that will be incurred by maximizing his profits by deciding the best way to bring in more clientele with the least amount of financial investment. In order for Josh to decide which incentive or sales pitch he should pursue, he plans on evaluating each one for cost efficiency.

So what is cost efficiency? Well, it's used by firms to measure the worth, costs, or benefits of a project, investment, or program. It is a way for a company to decide if a decision is worth the cost and helps a company understand any benefits they might receive if they pursue a business venture. So for Josh, he will need to know what each method to bring in customers will provide his company in terms of benefits, and he will need to know what each method will cost.

It's important to point out that there are often two pieces to cost efficiency: cost benefit and cost effectiveness. In the following sections, we will learn about each component.

A Cost Benefit Analysis

Cost benefit analysis is used when a company wants to know the economic worth of a project or some type of investment. This is accomplished by understanding the costs of the project and investment and making a comparison with the benefits. Both the costs and the benefits are expressed in terms of a monetary value. When the benefits are greater than the costs, the investment or project is said to be worth pursuing.

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