Marginal cost is the increase or decrease in the cost of producing one more unit or serving one more customer. It is also known as incremental cost.

It’s calculated when enough items have been produced to cover the fixed costs and production is at a break-even point. That’s where the only expenses going forward are variable or direct costs. 

Knowing marginal cost helps you maximize pricing and improve profitability for your store.

Learn the basics of marginal cost and figuring out yours, so you can create a more profitable business. 

What is marginal cost?

Marginal cost is the change in total production cost that comes from making or producing one more unit. It’s calculated by dividing the change in production costs by the change in quantity.

You can use marginal cost to determine your optimal production volume and pricing. It includes both fixed and variable costs. Investors also use it to help forecast the profit growth of a company as it increases in scale.

Key takeaways

  • Marginal cost refers to the additional cost incurred to produce one more unit of a product or service. 
  • Analyzing marginal cost helps you assess profitability and make informed decisions related to the product, including pricing.
  • Marginal cost is shown on a graph through a curve that typically takes a U-shape. Initially, as production increases, marginal costs decrease due to efficiencies gained.
  • A company maximizing profits will produce up to the point where marginal cost equals marginal revenue (MC=MR). 
  • When marginal cost falls, it means a company can produce more of its product or service without a significant increase in cost.

Marginal cost formula

Marginal cost can be calculated as follows:

Marginal cost = Change in total cost / Change in total quantity 

The formula for calculating marginal cost is MC = ΔTC/ΔQ, where:

  • MC represents marginal cost 
  • ΔTC represents change in total cost
  • ΔQ represents…

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