Worked-example setupScope and assumptions
- Northstar Services and all expected-value amounts are fictional teaching facts.
- The added review is legally and operationally feasible, and the displayed expected benefits and costs use the same one-year horizon and USD basis.
- The $20,000 system-design payment was made previously, is nonrefundable under both alternatives, and supplies no recoverable asset or exit value in this bounded decision.
- Period
- Fictional next twelve months
- Units
- USD of one-year expected benefit and cost
- Rounding
- Whole US dollars
Decision
Northstar Services is considering a second control review for a defined payment population. Its risk team supplies one-year expected-benefit and expected-cost estimates on a common basis.
| Position | Total expected benefit | Total expected cost |
|---|---|---|
| Current review process | $45,000 | $18,000 |
| Current process plus one review | 55,000 | 24,500 |
Northstar also paid $20,000 last year to design the workflow. The payment is nonrefundable and does not change under either current alternative.
Compare the increment
The added review changes expected benefit by $10,000 and expected cost by $6,500. Its net marginal benefit is $3,500 under the supplied estimates. The $20,000 past payment reconciles to the history of the process but contributes zero to the difference between today's alternatives.
This does not mean the historical payment disappears from accounting, governance, or process evaluation. It means “continue the current process” and “add one review” both inherit the same past payment, so including it in only one column would distort the comparison.
Challenge the result
The positive net amount supports adding the review only under the stated expected values and constraints. Before acting, management should test whether the avoided-loss estimate double counts existing controls, whether reviewer time displaces higher-value work, whether payment delays harm suppliers, and whether the added review targets the relevant risk.
The arithmetic checks an incremental comparison. It does not prove the estimates, determine an internal-control deficiency classification, or override legal, ethical, and operational constraints.
Common wrong paths
- Use the $27,000 current total net benefit: that describes the current process, not the change produced by one more review.
- Add the $20,000 past payment to marginal cost: it is unchanged and nonrecoverable under both alternatives.
- Treat $3,500 as certain savings: the inputs are expected values that need evidence and sensitivity analysis.
Verified calculation · economics foundations analysis
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- marginal comparisons
- 1 field
Inspect data
{
"second_control_review": {
"baseline_total_benefit": 45000,
"baseline_total_cost": 18000,
"past_sunk_cost": 20000,
"with_increment_total_benefit": 55000,
"with_increment_total_cost": 24500
}
}Recomputed result
| Measure | Value |
|---|---|
| benefit exceeds cost | 1 |
| marginal benefit | 10,000 |
| marginal cost | 6,500 |
| net marginal benefit | 3,500 |
| past sunk cost | 20,000 |
| sunk cost in incremental comparison | 0 |