"Imagine that General Mills’ senior managers meet to discuss the company’s U.S. retail food strategy. Suppose a consultant tells the management team, "General Mills needs to identify more successful smaller companies like Annie’s and buy them." One of the managers responds, "The purchase of Annie’s cost $820 million. Since we need to invest in our snack foods, which are doing well, there’s a limit on how many companies we can afford to acquire." Which criterion is this manager using to evaluate the proposed strategy?"

First of all, there´s always a limit on how much money a corporation or anyone else has to buy new businesses or invest in current operations. So you must decide what are you going to buy or invest in based on the benefits you expect to receive. You buy or invest in the options that offer the most benefit for the money invested.

For instance you have a total budget of $100 million for acquisitions in your corporation and the options are:

Company Cost Expected benefits Benefit/cost ratio

Freddie´s $60 MM $80 MM 1.33

Jack´s $40 MM $64 MM 1.6

Olivia´s $30 MM $45 MM 1.5

Based on the benefits cost ratio, management would probably decide to acquire Jack´s and Olivia´s corporations since their ratio is highest (1.6 and 1.5).