Marginal cost - What is marginal cost?
Marginal cost is the increase or decrease in production cost when producing an additional unit of a good or service.
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Put simply, it is the cost incurred by producing additional products or services. It is calculated by dividing the difference in total cost by the difference in quantity. Calculating the marginal cost can help you decide if it is financially rational to produce the extra unit.
Production costs consist of both fixed costs and variable costs. Fixed costs are an expense that does not change over time or depending on the productivity of the company (e.g. Insurance). Variable costs are an expense that is affected by fluctuations in production and changes between given periods (e.g. shipping).
You may also hear marginal cost referred to as "last unit cost." You need to know the marginal cost to maximize your profits.
Examples of how to calculate the marginal cost
- Change in total cost = new cost - old cost
- Change in quantity = new quantity - old quantity
- Marginal cost = change in total cost / change in quantity
For example, let’s say a shoemaker produces one pair of shoes per month which costs £30 in production. The next month, he decides to make 2 pairs of shoes which costs him £40 to make. The change in total cost is £10 (£40 - £30). The change in quantity is one (2 - 1). Therefore, the marginal cost is £10 to produce the extra pair of shoes (£10 change in cost / 1 change in quantity).
The following month, the shoemaker decides to make 6 pairs of shoes which costs £70 to produce. The change in total cost is £30 (£70 - £40). The change in quantity is four (6 - 2). Therefore, the marginal cost to produce 3 more pairs of shoes is £7.50 per pair. (£30 / 4).
What is the difference between marginal cost and marginal benefit?
Marginal benefit is the maximum amount of money a purchaser would pay for an additional good or service. On the contrary, the marginal cost is the change in overall costs when the additional good or service is produced.
Marginal benefit is a measurement from the consumer side, while marginal cost is from the producer side. They are both measures of how the cost or value of a product changes.
Marginal cost and Debitoor
With Debitoor, it is easy to track your company’s costs and easily stay on top of your business accounts. Debitoor allows you to record and keep track of all expenses incurred by your business. The programme offers a wide variety of categories to help you better organise and view your costs - whether they’re for supplies, labour, or shipping.