Marginal cost

Also known as: Marginal costs, incremental costs

The term marginal costs includes all costs that arise from the production of an additional quantity of a product.

Definition / explanation

If a production is increased, the fixed costs (e.g. rent and wages) are distributed over a larger quantity of products, while the Unit cost (costs incurred to produce a piece).

The resulting additional costs define the term
Marginal cost. In most cases, the marginal costs decrease as a company produces more units. A fact that can be very lucrative, especially for manufacturers with high fixed costs.

Calculation factor marginal costs

From a business point of view, marginal costs are an important factor in calculating costs. Because only with an exact cost history can the real production costs be determined and made concrete Pricing policy possible.

A distinction is made between proportional or linear and non-linear costs.

Linear and non-linear cost development

linear cost history - It is a linear cost if the cost increases proportionally with the increase in production. This means that the total costs are distributed over the proportionally growing production units.

However, a completely linear cost curve hardly ever occurs in practice, because this presupposes a production without any error.

non-linear cost curve - More practical relevance is the non-linear (degressive) cost curve, in which the increase in costs decreases with increasing production.

This means that as the production volume increases, cost efficiency is optimized at the same time.

Summary

  • Marginal costs are the additional costs for the production of another unit
  • Increase in production changes the cost situation
  • Linear cost trend: The costs increase proportionally to production
  • Non-linear cost trend: cost reduction through increasing production volume
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