Buzz
Marginal cost is an economic and production calculation that reveals the expense of producing additional units of a product. To compute it, you must understand key production variables, such as fixed and variable costs. Learn how to calculate marginal cost using the appropriate formula.
Steps
Prepare the Formula
Locate or create a table displaying production costs and output levels. Ensure your table includes the following:
- Output. Dedicate the first column to the total quantity of products manufactured. Output can increase incrementally, such as 1, 2, 3, 4,… or in larger intervals, like 1,000, 2,000, 3,000,…
- Fixed and variable costs. During production, certain expenses, such as factory rent, remain constant. Others, like material costs, fluctuate with output. Create columns adjacent to the output column for each type of cost and fill in the details accordingly.
Gather a pen, paper, and calculator. You may also opt to work on a spreadsheet. However, when starting out, writing down the formula will help you better grasp how to calculate marginal cost.
Calculate Total Cost
Add another column titled "Total Cost" to the right of the "Fixed Cost" and "Variable Cost" columns.
Sum the fixed and variable costs for each output value.
Enter the total cost into the column until all costs for each additional unit are accounted for.
- If using a spreadsheet program, you can input a formula to add fixed and variable costs to compute the total cost in this column.
Marginal Cost Formula
Write the formula "Marginal Cost = Change in Total Cost / Change in Total Output".
Create a column to the right of the total cost column labeled "Marginal Cost". The first row of this column will remain empty since marginal cost cannot be calculated without production.
Calculate the change in total cost by subtracting the total cost in row 2 from the total cost in row 3. For example, 40 minus 30.
Determine the change in total output by subtracting the total output in row 2 from the total output in row 3. For instance, 2 minus 1.
Plug the numbers into the formula. For example: Marginal Cost = 10 / 1. In this case, the marginal cost is 10.
Enter the calculated marginal cost into the column, starting from the second row. Continue subtracting the values from the row above to determine the marginal cost for the remaining units.
What You'll Need
- Calculator
- Production cost table
- Pencil/pen
- Paper
- Marginal cost formula
- Spreadsheet program (optional)
