marginal cost

  

Definition

The increase or decrease in the total cost of a production run for making one additional unit of an item. It is computed in situations where the breakeven point has been reached: the fixed costs have already been absorbed by the already produced items and only the direct (variable) costs have to be accounted for.

Marginal costs are variable costs consisting of labor and material costs, plus an estimated portion of fixed costs (such as administration overheads and selling expenses). In companies where average costs are fairly constant, marginal cost is usually equal to average cost. However, in industries that require heavy capital investment (automobile plants, airlines, mines) and have high average costs, it is comparatively very low. The concept of marginal cost is critically important in resource allocation because, for optimum results, management must concentrate its resources where the excess of marginal revenue over the marginal cost is maximum. Also called choice cost, differential cost, or incremental cost.


Use marginal cost in a sentence

  • The company couldn't afforded the marginal cost of producing anymore basketballs, they were now looking at raising prices so that they could afford to make more.

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  • The marginal cost of adding additional sticks of RAM in the new Dell laptops, far outweighs the usefulness that the consumer will see in the performance.

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  • The executives weren't sure whether it made sense to do another production run on the sub-neural implants , so they consulted with the accountants to look over the marginal cost figures.

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