Marginal Cost Definition
Marginal Cost Definition

See Also:
Marginal Costs

Marginal Cost Definition

Simply, a change in total cost that appears from the change in product numbers by one is a good marginal cost definition. Even more accurately, the marginal cost is the change that arises from producing one more product. As a general rule of thumb for a good marginal cost definition, the marginal cost is usually related to the marginal revenue for a company, at least in a graphical/analytical sense. This notion is under the assumption that the overall results are dependent of the overall volume provided for each company.

Marginal Cost Analysis

Though the actual definition may seem daunting, the real solution that stems from these facts is easy to understand. As said above, the marginal cost is the change in cost that arises from producing one more unit of product. Furthermore, one needs to understand and realize the necessary steps to produce another unit of product.
For example, if a deck building company wants to know their marginal cost to create another deck, they would need to figure out how much lumber it will cost to create this deck, also the nails and caulk necessary to finish the deck. It is also possible that a second warehouse may be necessary to store all the excess lumber bought. At the same time, they may need to spend money on a show-room, because of this product and the increasing popularity of the company. Furthermore, the company needs to decide whether more hands need be hired to complete the job. All of these variables taken into consideration, any of these could add to the cost necessary to create another deck. When all of the obligatory costs are put together from this listed situation, the marginal cost is realized and accepted.

Marginal Cost versus Marginal Revenue

As stated above, the marginal cost is usually related to marginal revenue in an economical sense. C company’s goal is to reach a situation where the marginal cost is equal to the marginal revenue. It is in this circumstance where the greatest profit can be achieved. As long as average total cost is less than the intersection of marginal cost and marginal revenue, economical profit can be achieved by a company. Furthermore, if economical profit is being obtained, the company is very well off indeed.
Marginal Cost Definition

ARTICLES YOU MIGHT LIKE

The Accounting Gap Between Large and Small Companies

The Accounting Gap: It’s unfortunate, but true. A large gap exists between the accounting departments of large or publicly traded companies and smaller or private companies. In our past 25 years of consulting we’ve noticed that more often than not, these smaller/private companies will fill the gap with Bookkeepers, rather than the degreed Accountants/CPAs they

Read More »

The Struggles of Private Company Accounting

Building your Accounting Department… When I meet a business owner operating at a successful $10+ mil in revenue I often hear them say “My CPA…” and I immediately know they are referring to a tax CPA. One thing ALL entrepreneurs have in common is that they have to file a tax return. So from day

Read More »

Financial Ratios

See also:Quick Ratio AnalysisPrice to Book Value AnalysisPrice Earnings Growth Ratio AnalysisTime Interest Earned Ratio Analysis Use of Financial Ratios Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

THE ART OF THE CFO®

Financial Leadership Workshop

Days
Hours
Min

June 12-15th, 2023

SHARE THIS ARTICLE
WIKI CFO® - Browse hundreds of articles