MARGINAL COST EQUATION

The marginal cost formula is nothing but the mathematical representation to capture the incremental cost impact due to the production of additional units of a good or service. It is computed by dividing the change in total cost due to the production of additional goods by the change in the number of goods produced. Although the total cost is comprised of fixed cost and variable costs, the variation in total cost due to a change in the quantity of production is primarily because of variable cost which includes labor and material cost. On the other hand, there might be a few occasions when there is an increase witnessed in fixed costs which include administration, overhead, and selling expenses. Mathematically,

SALES = VARIALBLE COST + FIXED EXPENSES nPROFIT&LOSS

OR SALES – VARIABLE EXPENSES = FIXED EXPENSESP&L

Change in Total Cost = Total Cost of Production including additional unit – Total Cost of Production of a normal unit

Change in Quantity = Total quantity product including additional unit – Total quantity product of normal unit

Below are the steps to calculate marginal cost –

Consider the total output, fixed cost, variable cost, and total cost as input.

Prepare a production graph considering a different quantity of output.

Find the change in cost i.e., a difference in the total cost of production, including additional units and total cost of production of the normal unit.

Find the change in quantity, i.e., total quantity product, including additional unit and total quantity product of normal unit.

Now, as per the formula of Marginal cost divide change in cost by a change in quantity, and we will get marginal cost.

ILLUSTRATION 1

A manufacturing company has a current cost of production of 1000 pens at $1,00,000, and its future output expectation is 2000 pens with the future cost of production of $1,25,000. So, the calculation of the marginal cost will be 25.

PARTICULARS	AMOUNT
CURRENT UNIT OF PRODUCTION	1000
CURRENT COST OF PRODUCTION	100,000
FUTURE UNIT OF PRODUCTION	2000
FUTURE COST OF PRODUCTION	125,000
MARGINAL COST	?

Answer rating: 100% (QA)

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