How To Calculate Marginal Cost
If your marginal cost is lower than the revenue of a unit than it is worth
Hi, my name is Grant Hobson. I have been a finance analyst for the last six years. Today,I am going to run you through some financial performance methods as well as some investment and payroll techniques. How to calculate marginal cost? The marginal cost of production is the increase in total cost as a result of producing one extra unit. Marginal costs are not constant, for example, a factory may be operating at the highest capacity income if all workers are working full time hours. To increase the production by one more unit would mean paying overtime. So the marginal cost would be higher in the current cost per unit. Conversely, an input may become cheaper as the quantities purchased rise because you get quantity discounts, so marginal cost may fall as production increases. Importance of marginal cost varies greatly from industry to industry and from products to products. The marginal cost of manufacturing jewellery that is a bit high due to the skills and labour that goes into it. On the other hand, the marginal cost of producing a small item of colvin would be negligible. The calculation for marginal cost is as follows : if we take two quantities here, quantity A and quantity B, so when the company produces four thousand five hundred units of the product, the cost of the product is the total three hundred and seventy thousand pounds, that is an average cost of eighty two pounds and twenty two for the product. The status B, when the quantity goes up to five thousand six hundred units, the cost is four hundred and fifty five thousand pounds which is eighty one pounds and twenty five pence per unit, so to work out the marginal cost, we take the change in the quantity five thousand six hundred less four thousand five hundred and then we take the change in the cost four hundred and fifty five thousand less three hundred and seventy thousand which will give you a marginal cost of production seventy seven pounds and twenty seven, so if you wanted to produce one more unit, this is the cost that it would be. If your marginal cost is lower than the revenue you generate from that un, then it is worth producing.