The benefit-to-cost ratio is a financial term that describes the comparison of the amount of money made through the production of an item versus the costs incurred during the production process. Businesses must evaluate the benefit-to-cost ratio to make sure that production is profitable. If the costs outweigh the benefits, then it is no longer profitable for a company to produce the item under the same set of circumstances.
Figure the total amount of money made from selling a product over a certain period of time to determine the benefit. For instance, if a company makes $100,000 in a year from selling toy cars, then $100,00 would be the benefit.
Determine the total costs incurred over the course of producing the item. For example, if the company incurs expenses of $20,000 to produce the toy cars (expenses such as rent, overhead, supplies, labor, shipping and handling), then the cost would be $20,000.
Divide the total benefit by the total cost. In this example, divide 100,000 by 20,000, and the result would be 5. Therefore, the benefit-to-cost ratio for producing these toy cars would be 5-to-1, or 5:1.
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