Incremental & Marginal Cost - Economics Concepts, Business Economics & Finance | Business Economics & Finance - B Com PDF Download

Incremental Costs

Incremental costs are associated with a choice and therefore only ever include forward-looking costs. Previously made purchases or investments, such as the cost to build a factory, are called “sunk” costs and are not included. The Incremental cost can include many different direct and indirect cost inputs depending upon the situation. However, only costs that will change as a result of the decision are to be included. When a factory production line is at full capacity, the incremental cost of adding another production line might include cost of the equipment, the people to staff the line, electricity to run the line and additional human resources and benefits.

Marginal Costs

Marginal cost is a more specific term, referring to the cost to produce one more unit of product or service. Originally used to optimize production, products with high marginal costs tend to be unique, labor intensive or at the beginning of a product life cycle. Low marginal cost items are often very price competitive. The classic example is the cost to print encyclopedias. It costs a lot to print the first encyclopedia. Research must be done, entries written, copy typeset. But it requires very little additional cost to print the 10,000th encyclopedia. Marginal cost may equal incremental cost when only one additional unit is being considered.