Marginal Cost, How Is It Calculated?

Economically, marginal cost is the change in the total cost of production resulting from the manufacture or production of one additional unit. As an entrepreneur you certainly need to calculate the cost of production, not only that, you also calculate every other cost component such as marginal costs. Simply put, marginal cost is a decrease or increase in the total cost of a firm.

The purpose of analyzing marginal costs is to determine at what point a firm can reach its economies of scale.

Marginal cost usually occurs because of the addition or subtraction of one additional unit of product. But besides that, marginal cost is also related to marginal revenue.

Why is that? Usually to get a maximum profit, the company will increase production until it reaches the point where the marginal cost is equal to the amount of marginal revenue. In economic terms, marginal revenue is referred to as MR (marginal revenue) and marginal cost is referred to as MC (marginal cost).

What is Marginal Cost?

Marginal cost is the additional cost used when producing one additional unit of product. In addition, marginal cost is a cost that shows the rate at which the total cost of a product changes when production increases by one unit.

Marginal cost is very important for making business decisions where a management must be able to make decisions about the allocation of resources in the production process.

Also Read: Know the Economic Order Quantity (EOQ) and How to Calculate It.

The Importance of Applying Marginal Cost Analysis for Companies

Everyone involved in the business world must know how to calculate marginal. Performing a marginal calculation needs to be done before the production process, so that the company and all parties involved in it can know how many target outputs they need.

A manager will make decisions related to functional. At any level, a manager will be responsible for his decisions around purchasing, cost of goods ordered, investment, personnel, marketing, and others.

Of course, in making a decision a manager must require data and evaluation from all parties involved. Therefore, it is very important to ensure that every cost and income data is recorded properly so that it can be used as a basis for making important financial decisions.

Making financial reports is one way to make the right decisions for a company. But what if you are a busy businessman who doesn’t have time to make financial reports? Don’t worry, you can use the Accounting Service,  which is a financial report creation service at an affordable price that is carried out by experienced professionals in the accounting field.

Marginal Cost Formula

The marginal cost formula is often used in calculating each company’s margin costs. The following is the marginal cost formula, namely:

MC = TC / Q

Description:
MC= Marginal cost (marginal cost)

TC= Total change in cost

Q= Changes in the quality of goods and services (total change in quantity)

Steps in Calculating Marginal Cost

There are 3 stages in calculating marginal cost, namely:

• Determine Quantity Change

When you want to calculate marginal cost, of course you must know the total cost required to produce one unit of product produced by the company. The sum of the fixed costs must be the same throughout the cost analysis. Therefore, the first step in calculating marginal cost is to determine the point at which fixed costs will change.

• Calculating Cost Changes

After you know the change in the production quantity, then the next step you need to do is calculate the change in costs. This cost change is obtained from reducing the total cost of the old production with the total cost of the new production. The total cost of production is obtained from the sum of fixed costs and variable costs.

• Calculating Marginal Cost

Marginal cost is the cost required to produce one additional unit of product. In other words, calculating marginal cost is done to find out the increase in costs required for each additional unit of production. The result of marginal cost is obtained by dividing the required production cost by the change in the quantity of the product.

How to Calculate Marginal Cost

Once you know the marginal cost formula, then you can easily figure out how to calculate the marginal cost for your company. To know how to calculate marginal cost. The following is an example of possible marginal cost.

From the example of marginal cost, there is a company ABCDEF, LLC as much as $ 4 million to produce 1000 table units. When the total production has reached 2000 units, the company will spend $ 6 million to produce it.

From the example of the marginal cost problem above, what is the total marginal cost of producing the table?

Is known:

TC = $ 6 million – $ 4 million

TC = $ 2 million

Q = 2000 units – 1000 units

Q = 1000 units

Solution:

MC = TC / Q

MC = $ 2,000,000 / 1000 units

MC = $ 2000 per unit

Then the marginal cost of producing the table is $ 2000. Which means that the total cost increases by $ 2000 with one table production.

As a business owner, it is very important that you track and understand how various costs change with changes in volume and levels of output. Of course in the breakdown of these costs greatly determine the price level of services and help in many other aspects of the overall business strategy.

By paying attention to every calculation of the marginal cost of your business, it will certainly make you get and generate the maximum possible profit. But to calculate each company’s profit, you certainly really need accounting software.


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