marginal cost

marginal cost
Econ
the amount by which the costs of a firm will be increased if its output is increased by one more unit, of if one more customer is served.
EXAMPLE
If the price charged is greater than the marginal cost, then the revenue gain will be greater than the added cost. That, in turn, will increase profit, so the expansion in production or service makes economic sense and should proceed. The reverse is also true: if the price charged is less than the marginal cost, expansion should not go ahead.
     The formula for marginal cost is:
Change in cost /change in quantity
     If it costs a company $260,000 to produce 3,000 items, and $325,000 to produce 3,800 items, the change in cost would be:
$325,000 – $260,000 = $65,000
The change in quantity would be:
3,800 – 3,000 = 800
When the formula to calculate marginal cost is applied, the result is:
$65,000 /800 = $81.25
If the price of the item in question were $99.95, expansion should proceed.
     Relying on marginal cost is not fail-safe, however; putting more products on a market can drive down prices and thus cut margins. Moreover, committing idle capacity to longterm production may tie up resources that could be directed to a new and more profitable opportunity. An important related principle is contribution: the cash gained (or lost) from selling an additional unit.

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